EXHIBIT 10.24
NEW ISSUE-BOOK-ENTRY ONLY RATING: Standard & Poor's: "AAA"
(Ambac Insured)
(See "RATING" herein)
In the opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California, Bond Counsel, under existing statutes,
regulations, rulings and judicial decisions, and assuming certain
representations and compliance with certain covenants and requirements described
herein, interest (and original issue discount) on the Bonds is excluded from
gross income for federal income tax purposes and is not an item of tax
preference for purposes of calculating the federal alternative minimum tax
imposed on individuals and corporations. In the further opinion of Bond Counsel,
interest on the Bonds is exempt from State of California personal income tax. In
addition, the difference between the issue price of a Bond (the first price at
which a substantial amount of the Bonds of a maturity is to be sold to the
public) and the stated redemption price at maturity with respect to the Bond
constitutes original issue discount. See "TAX MATTERS" herein with respect to
certain tax consequences with respect to the Bonds.
$31,555,000
SAN JUAN BASIN AUTHORITY
LEASE REVENUE BONDS
(GROUND WATER RECOVERY PROJECT)
ISSUE OF 2002
Dated: Date of Delivery Due: December 1, as shown on the inside front cover
This cover page contains certain information for general reference only.
It is not a summary of the issue. Investors are advised to read the entire
Official Statement to obtain information essential to making an informed
decision. Capitalized undefined terms used in this cover page shall have the
meanings given such terms herein.
The Bonds are issuable as fully registered bonds and when initially issued
will be registered in the name of Cede & Co., as nominee of The Depository Trust
Company, New York, New York ("DTC"). Purchases of the Bonds will be made in
book-entry form only, in denominations of $5,000 or any integral multiple
thereof, through brokers and dealers who are, or who act through, DTC
Participants. Beneficial owners of the Bonds will not be entitled to receive
physical delivery of bond certificates so long as DTC or a successor securities
depository acts as the securities depository with respect to the Bonds. So long
as DTC or its nominee is the registered owner of the Bonds, reference herein to
Bondowners or registered owners shall mean Cede & Co., as aforesaid, and
payments of principal of and interest on the Bonds will be made directly to DTC
by BNY Western Trust Company, as Trustee. Disbursement of such payments to DTC
Participants is the responsibility of DTC and disbursement of such payments to
the Beneficial Owners is the responsibility of DTC Participants. Interest on the
Bonds is payable on June 1 and December 1 of each year, commencing June 1, 2003.
See "DESCRIPTION OF THE BONDS--General Terms" herein.
The Bonds are subject to extraordinary, optional and mandatory redemption
prior to maturity as described herein. See "DESCRIPTION OF BONDS--Redemption"
herein.
Proceeds of the Bonds are to be applied to (i) finance and reimburse the
costs of the design, development, acquisition and construction of a groundwater
recovery plant and related improvements and facilities, (ii) fund a debt service
reserve fund securing the Bonds, (iii) fund capitalized interest through June 1,
2004, and (iv) pay certain costs of issuance of the Bonds. See "DESCRIPTION OF
BONDS--Sources and Uses of Funds" and "THE PROJECT" herein.
Payment of the principal of and interest on the Bonds when due will be
insured by a financial guaranty insurance policy to be issued by
AMBAC
simultaneously with the delivery of the Bonds. See "SOURCES OF PAYMENT AND
SECURITY FOR THE BONDS--Financial Guaranty Insurance Policy" herein.
The Bonds are special, limited obligations of the San Juan Basin Authority
(the "Authority") payable solely from the Trust Estate, including Lease Payments
to be made by the Capistrano Valley Water District (the "Water District") to the
Authority solely from Revenues of the Water District pledged to the payment of
the Lease Payments pursuant to the Lease Agreement, dated as of December 1, 2002
(the "Lease Agreement"), between the Water District and the Authority. Pursuant
to the Trust Agreement, dated as of December 1, 2002 (the "Trust Agreement"),
among the Water District, the Authority and the Trustee, the Authority has
assigned all of its rights, title and interest (other than certain Additional
Payments) in the Lease Agreement to the Trustee for the benefit of the
Bondowners. The Lease Agreement provides that, except with respect to certain
rights of the Water District to terminate the Lease Agreement early as permitted
thereunder, the obligation of the Water District to make the Lease Payments is
absolute and unconditional and the Water District will not discontinue or
suspend any Lease Payments required to be made by it thereunder when due until
such time as the Lease Payments are paid in full. For the circumstances under
which the Water District may terminate the Lease Agreement and the consequences
thereof, see "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Water District
Right to Terminate Lease" herein. The Property subject to the Lease Agreement
and the improvements thereon and the Water System are not pledged or available
to the Trustee or the Bondowners in the event of termination of the Lease
Agreement, default in the payment of Lease Payments or otherwise, and no default
under Lease Agreement will result in the loss of the Property or the
improvements thereon, the Water System or other assets of the Water District.
See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Water District Right to
Terminate Lease" and "--Limited Recourse on Default" herein.
The obligation of the Water District to make the Lease Payments and other
payments required to be made by it under the Lease Agreement is a special
obligation of the Water District payable, in the manner provided in the Lease
Agreement, solely from Revenues, and does not constitute a debt of the Water
District in contravention of any constitutional or statutory debt limitation or
restriction. Except for the pledge of Revenues pursuant to the Lease Agreement,
neither the faith and credit nor the taxing power of the Water District or the
City of San Juan Capistrano (the "City") is pledged to the payment of the Lease
Payments (and the merger of the Water District into the City, which is expected
to occur in early 2003, will not affect this limitation). UNDER CERTAIN
CIRCUMSTANCES DESCRIBED HEREIN, THE WATER DISTRICT HAS THE RIGHT TO TERMINATE
THE LEASE AGREEMENT. IN SUCH EVENT, THE WATER DISTRICT WILL HAVE NO FURTHER
OBLIGATION TO MAKE ANY LEASE PAYMENTS UNDER THE LEASE AGREEMENT AND THE TRUSTEE
WILL HAVE NO FURTHER RIGHTS OR RECOURSE WITH RESPECT TO THE PROPERTY OR THE
IMPROVEMENTS THEREON. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Water
District Right to Terminate Lease" and "DESCRIPTION OF
BONDS--Redemption--Extraordinary Redemption" herein.
THE BONDS DO NOT CONSTITUTE A CHARGE AGAINST THE GENERAL CREDIT OF THE
AUTHORITY AND ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF, OR CHARGE OR
LIEN UPON, ANY PROPERTY OF THE AUTHORITY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT
THE FUNDS AND SECURITY PROVIDED UNDER THE TRUST AGREEMENT. NEITHER THE FAITH AND
CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA OR ANY PUBLIC AGENCY
THEREOF OR ANY MEMBER OF THE AUTHORITY IS PLEDGED TO THE PAYMENT OF THE
PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON, THE BONDS. SEE "SOURCES OF
PAYMENT AND SECURITY FOR THE BONDS" HEREIN.
----------
MATURITY SCHEDULE - See Inside Front Cover
----------
The Bonds will be offered when, as and if issued and received by the
Underwriter, subject to the approval of validity by Stradling Yocca Carlson &
Rauth, a Professional Corporation, Newport Beach, California, Bond Counsel, and
to certain other conditions. Certain legal matters in connection with the Bonds
will be passed upon for the Underwriter by Orrick, Herrington & Sutcliffe LLP;
for the City and the Water District by John R. Shaw, Esq., San Juan Capistrano,
California, City Attorney and General Counsel to the Water District, and by
Hawkins, Delafield & Wood, New York, New York, Special Counsel to the City and
the Water District; and for the Authority by Stradling Yocca Carlson & Rauth, a
Professional Corporation, Newport Beach, California. It is expected that the
Bonds will be available for delivery through DTC in New York, New York, on or
about January 8, 2003.
LEHMAN BROTHERS
December 11, 2002
MATURITY SCHEDULE
$16,290,000 Serial Bonds
MATURITY PRINCIPAL INTEREST MATURITY PRINCIPAL INTEREST
(DECEMBER 1) AMOUNT RATE YIELD CUSIP NO. (DECEMBER 1) AMOUNT RATE YIELD CUSIP NO.
- ------------ --------- -------- ----- --------- ------------ ----------- -------- ----- ---------
2005 $ 755,000 3.000% 1.700% 798250AA4 2013 $ 990,000 5.000% 3.930% 798250AJ5*
2006 780,000 3.000 2.100 798250AB2 2014 1,040,000 5.250 4.050 798250AK2*
2007 805,000 3.000 2.500 798250AC0 2015 1,095,000 5.250 4.180 798250AL0*
2008 825,000 3.000 2.850 798250AD8 2016 1,150,000 5.250 4.280 798250AM8*
2009 850,000 4.000 3.160 798250AE6 2017 1,210,000 5.250 4.380 798250AN6*
2010 885,000 4.000 3.410 798250AF3 2018 1,275,000 5.250 4.460 798250AP1*
2011 920,000 3.600 3.630 798250AG1 2019 1,340,000 5.250 4.520 798250AQ9*
2012 955,000 3.700 3.730 798250AH9 2020 1,415,000 5.250 4.580 798250AR7*
$3,045,000 5.000% Term Bond due December 1, 2022 Price 101.792 CUSIP 798250A S5*
$12,220,000 5.000% Term Bond due December 1, 2034 Price 100.538 CUSIP 798250AT3*
- ----------
*Indicates pricing to call at par on December 1, 2012.
No broker, dealer, salesperson or other person has been authorized by the
City of San Juan Capistrano (the "City"), the Capistrano Valley Water District
(the "Water District"), the San Juan Basin Authority (the "Authority") or the
Underwriter to give any information or to make any representations other than
those contained herein and, if given or made, such other information or
representation must not be relied upon as having been authorized by the City,
the Water District, the Authority or the Underwriter. This Official Statement
does not constitute an offer to sell or the solicitation of an offer to buy, nor
shall there be any sale of the Bonds by a person in any jurisdiction in which it
is unlawful for such person to make such offer, solicitation or sale. This
Official Statement is not to be construed as a contract with the purchasers of
the Bonds.
Certain statements contained in this Official Statement reflect not
historical facts but forecasts and "forward-looking" statements. In this
respect, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe" and similar expressions are intended to identify forward-looking
statements. All projections, forecasts, assumptions, expressions of opinions,
estimates and other forward-looking statements, are not to be construed as
representations of fact and are qualified in their entirety by the cautionary
statements set forth in this Official Statement. The forward-looking statements
are not guarantees of future performance. Actual results may vary materially
from what is contained in a forward-looking statement. The Authority and the
Water District assume no obligation to provide public updates of forward-looking
statements.
The Underwriter has provided the following sentence for inclusion in this
Official Statement. The Underwriter has reviewed the information in this
Official Statement in accordance with, and as part of, its responsibilities to
investors under the federal securities laws as applied to the facts and
circumstances of this transaction, but the Underwriter does not guarantee the
accuracy or completeness of such information.
The information set forth herein has been obtained from the Authority, the
Water District and from other sources and is believed to be reliable but is not
guaranteed as to accuracy or completeness. The information and expressions of
opinions herein are subject to change without notice and neither the delivery of
this Official Statement nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Water District since the date hereof. This Official Statement is
submitted in connection with the sale of Bonds referred to herein and may not be
reproduced or used, in whole or in part, for any other purpose, unless
authorized in writing by the Water District. All summaries of the documents and
laws are made subject to the provisions thereof and do not purport to be
complete statements of any or all such provisions.
IN CONNECTION WITH THIS OFFERING OF THE BONDS, THE UNDERWRITER MAY
OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF
SUCH BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE
UNDERWRITER MAY OFFER AND SELL BONDS TO CERTAIN DEALERS, INSTITUTIONAL INVESTORS
AND OTHERS AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER
PAGE HEREOF AND SUCH PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY
THE UNDERWRITER.
SAN JUAN BASIN AUTHORITY
BOARD OF DIRECTORS
John Schatz, President
Jack Foley, Director
Diane Bathgate, Director
Richard Gardner, Director
OFFICERS
Don Martinson, Administrator and Secretary
SPECIAL SERVICES
CITY ATTORNEY
AND
GENERAL COUNSEL TO WATER DISTRICT
John R. Shaw, Esq.
San Juan Capistrano, California
Special Counsel to Water District
and City
Hawkins, Delafield & Wood
New York, New York
BOND COUNSEL
AND
AUTHORITY COUNSEL
Stradling Yocca Carlson & Rauth, a Professional Corporation
Newport Beach, California
FINANCIAL ADVISOR
Fieldman, Rolapp & Associates
Irvine, California
TRUSTEE
BNY Western Trust Company
Los Angeles, California
TABLE OF CONTENTS
PAGE
INTRODUCTORY STATEMENT........................................................................................ 1
DESCRIPTION OF BONDS.......................................................................................... 5
General Terms........................................................................................ 5
Redemption........................................................................................... 5
Transfer and Exchange................................................................................ 7
Sources and Uses of Funds............................................................................ 8
Debt Service Schedule................................................................................ 9
SOURCES OF PAYMENT AND SECURITY FOR THE BONDS................................................................. 9
Source of Payment.................................................................................... 9
Lease Payments.......................................................................................10
Water District Right to Terminate Lease..............................................................11
Service Contract Letter of Credit....................................................................15
Additional Payments..................................................................................16
Limited Recourse on Default..........................................................................16
Pledge of Revenues...................................................................................17
Revenue Fund.........................................................................................18
Additional Obligations; Parity Obligations...........................................................19
Rate Covenant; Impact of Proposition 218.............................................................19
Lease Revenue Bonds Rate Stabilization Reserve; Impact of Proposition 218............................19
Debt Service Reserve Account.........................................................................20
Financial Guaranty Insurance Policy..................................................................20
Insurance and Indemnity Agreement and Insurance Agreement Guaranty...................................23
THE PROJECT...................................................................................................26
Overview.............................................................................................26
Agreement with Metropolitan Water District of Southern California....................................28
Project Water Rights and Implementation Agreement....................................................29
Liquidated Damages under the Service Contract........................................................29
The Company..........................................................................................31
Independent Engineer's Report........................................................................32
THE AUTHORITY.................................................................................................34
THE WATER DISTRICT............................................................................................34
Introduction.........................................................................................34
Governance and Management............................................................................35
Merger...............................................................................................35
Service Area; Overview of Water System Facilities....................................................36
Sources of Water Supply..............................................................................36
Service Connection Information.......................................................................39
Largest Customers....................................................................................39
Rates and Charges; Collection........................................................................40
Proposition 218......................................................................................42
Projected Water Usage................................................................................45
Regulatory Requirements..............................................................................45
WATER DISTRICT FINANCIAL INFORMATION..........................................................................46
Outstanding Indebtedness.............................................................................46
-i-
TABLE OF CONTENTS
(continued)
PAGE
Historic Operating Results...........................................................................47
Management Discussion and Analysis...................................................................48
Projected Operating Results..........................................................................49
Water System Insurance...............................................................................51
Employee Benefits....................................................................................51
California Electricity Market........................................................................51
Security of the System...............................................................................53
Investment of Water District Funds...................................................................54
TAX MATTERS...................................................................................................55
INDEPENDENT ACCOUNTANTS.......................................................................................56
RATING........................................................................................................56
CERTAIN LEGAL MATTERS.........................................................................................57
LITIGATION....................................................................................................57
UNDERWRITING..................................................................................................57
CONTINUING DISCLOSURE.........................................................................................57
AVAILABILITY OF DOCUMENTS.....................................................................................58
MISCELLANEOUS.................................................................................................58
APPENDIX A - FINANCIAL STATEMENTS OF THE WATER DISTRICT......................................................A-l
APPENDIX B - BOOK-ENTRY-ONLY SYSTEM..........................................................................B-l
APPENDIX C - DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS..................C-l
APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT...........................................D-l
APPENDIX E - FORM OF CONTINUING DISCLOSURE AGREEMENT.........................................................E-l
APPENDIX F - PROPOSED FORM OF BOND COUNSEL OPINION...........................................................F-l
APPENDIX G - INDEPENDENT ENGINEER'S REPORT...................................................................G-l
APPENDIX H - SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY....................................................H-l
APPENDIX I - GENERAL INFORMATION CONCERNING THE CITY OF SAN JUAN CAPISTRANO..................................I-1
APPENDIX J - CERTAIN INFORMATION CONCERNING THE SERVICE CONTRACT LETTER OF CREDIT PROVIDER...................J-l
-ii-
OFFICIAL STATEMENT
$31,555,000
SAN JUAN BASIN AUTHORITY
LEASE REVENUE BONDS
(GROUND WATER RECOVERY PROJECT)
ISSUE OF 2002
INTRODUCTORY STATEMENT
The following introductory statement is subject in all respects to the
more complete information set forth in this Official Statement, including the
cover page and appendices (the "Official Statement"). The descriptions and
summaries of various documents hereinafter set forth do not purport to be
comprehensive or definitive and are qualified in their entirety by reference to
each document. Capitalized terms used in the body of this Official Statement and
not otherwise defined therein shall have the meanings given to such terms in the
definitional sections included in Appendix C--"DEFINITIONS AND SUMMARY OF
CERTAIN PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS" and Appendix D--"SUMMARY OF
CERTAIN PROVISIONS OF THE SERVICE CONTRACT," attached hereto.
This Official Statement is provided to furnish information in connection
with the offering of $31,555,000 aggregate principal amount of San Juan Basin
Authority Lease Revenue Bonds (Ground Water Recovery Project) Issue of 2002 (the
"Bonds"). The Bonds are being issued under the Trust Agreement, dated as of
December 1, 2002 (the "Trust Agreement"), among the Capistrano Valley Water
District (the "Water District"), the San Juan Basin Authority (the "Authority"),
and BNY Western Trust Company, Los Angeles, California, as trustee (the
"Trustee"), pursuant to the provisions of the Joint Exercise of Powers Act
(commencing with Section 6500), comprising Article 1, Article 2 and Article 4 of
Division 7 of Title 1 of the California Government Code. The Bonds are special,
limited obligations of the Authority payable solely from the Trust Estate,
including certain lease payments (the "Lease Payments") to be made by the Water
District to the Authority solely from Revenues of the Water District pledged to
the payment of the Lease Payments pursuant to the Lease Agreement, dated as of
December 1, 2002 (the "Lease Agreement"), between the Water District and the
Authority.
The Water District (formerly known as the Orange County Waterworks
District No. 4) was formed to serve the San Juan Capistrano area in 1930 and is
currently existing pursuant to the California Water Code (the "Water Code"). The
Water District was governed by the Board of Supervisors (the "Board of
Supervisors") of the County of Orange, California (the "County") until 1970 when
the district became a subsidiary district of the City of San Juan Capistrano
(the "City"). At that time, the City Council of the City became the governing
board of the Water District pursuant to the Water Code. For more complete
information regarding the Water District, including certain financial
information, see "THE WATER DISTRICT" and "WATER DISTRICT FINANCIAL
INFORMATION." The Water District intends to formally merge into the City in
early 2003 pursuant to a formal reorganization process that has been instituted
with the County of Orange Local Agency Formation Commission ("LAFCO"). See "THE
WATER DISTRICT--Merger."
The Bonds are issuable as fully registered bonds and when initially issued
will be registered in the name of Cede & Co., as nominee of The Depository Trust
Company, New York, New York ("DTC"). Purchases of the Bonds will be made in
book-entry form only, in denominations of $5,000 or any integral multiple
thereof, through brokers and dealers who are, or who act through, DTC
participants. See Appendix B--"BOOK-ENTRY-ONLY SYSTEM." Interest on the Bonds is
payable on June 1 and December 1 of each year, commencing June 1, 2003. The
Bonds are subject to extraordinary, optional
and mandatory redemption prior to maturity as described herein. See "DESCRIPTION
OF BONDS--General Terms" and "--Redemption."
The proceeds of the Bonds are to be applied to (i) finance and reimburse
the costs of the design, development, acquisition and construction of a
groundwater recovery plant (the "Groundwater Recovery Plant") and related
offsite improvements and facilities (together with the Groundwater Recovery
Plant and as further defined in the Trust Agreement, the "Service Contract
Project Improvements"), (ii) fund a debt service reserve fund securing the
Bonds, (iii) fund capitalized interest through June 1, 2004, and (iv) pay
certain costs of issuance of the Bonds. See "DESCRIPTION OF BONDS--Sources and
Uses of Funds" and "THE PROJECT."
Pursuant to the Service Contract for the Design, Construction, Financing
and Operation of the San Juan Basin Desalter Project, dated September 3, 2002
(the "Service Contract"), between the Water District and Eco Resources, Inc.
(the "Company"), the Company has agreed to design and construct the Service
Contract Project Improvements. For information regarding the Company, see "THE
PROJECT--The Company." Under the Service Contract, the Company is required to
complete the Service Contract Project Improvements for a fixed price of
$25,030,607 and by a date certain of September 1, 2004, as such date may be
extended upon the occurrence of an Uncontrollable Circumstance, Water District
requested changes or District Fault, and once completed, operate such Service
Contract Project Improvements, subject to the conditions and performance
guarantees set forth in the Service Contract. See Appendix D--"SUMMARY OF
CERTAIN PROVISIONS OF THE SERVICE CONTRACT" for a summary of certain provisions
of the Service Contract. However, in the Insurance Agreement (see "SOURCES OF
PAYMENT AND SECURITY FOR THE BONDS--Insurance and Indemnity Agreement and
Insurance Agreement Guaranty), the Company will agree for the benefit of the
Bond Insurer that within six months after the date the Bonds are issued, the
Company will assign all of its rights in and to, and delegate all of its
obligations under, the Service Contract to a wholly owned subsidiary of the
Company that satisfies certain corporate separation requirements set forth in
the Insurance Agreement (the "SPE"), and will cause the SPE to assume all of the
obligations of the Company under the Service Contract. Upon the effectiveness of
such assignment, the Company will be released from all of its obligations under
the Service Contract and the Insurance Agreement; provided that the Service
Contract Guaranty Agreement and the Insurance Agreement Guaranty will extend to
such obligations of the SPE following such assignment. See "SOURCES OF PAYMENT
AND SECURITY FOR THE BONDS--Insurance and Indemnity Agreement and Insurance
Agreement Guaranty--Assignment of Company Rights and Obligations." The Company
will simultaneously enter into a management and administrative services
agreement with the SPE for a term equal to the term of the Service Contract,
whereby the Company will provide certain management and administrative services
necessary to support the SPE's performance of its obligations under the Service
Contract, including the construction and operation of the Service Contract
Project Improvements. Accordingly, as used in this Official Statement, the term
"DB/Operator" shall mean the Company before such assignment, and shall mean the
SPE thereafter.
The Service Contract continues in effect for 20 years following the
provisional acceptance of the Service Contract Project Improvements under the
Service Contract (as further defined in the Service Contract, "Provisional
Acceptance") (or, if Provisional Acceptance is not certified by the DB/Operator,
the Acceptance Date), subject to renewal and earlier termination as set forth in
the Service Contract, including certain buy-out rights of the Water District.
See Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Breach,
Default, Remedies and Termination." See also "DESCRIPTION OF
BONDS--Redemption--Extraordinary Redemption." The full and prompt performance
and observance of each and all of the amounts payable by, and the covenants and
agreements of, the DB/Operator pursuant to the terms of the Service Contract
will be guaranteed by Southwest Water Company, a Delaware corporation and the
parent corporation of the Company (the "Guarantor"), pursuant to a Service
Contract Guaranty Agreement, dated as of September 3, 2002 (the "Service
Contract Guaranty Agreement"), provided by the Guarantor in favor of the Water
District.
2
PSOMAS, a California corporation, has been retained as the Independent
Engineer with respect to the design, development, acquisition and construction
of the Service Contract Project Improvements (the "Project"), and has prepared
an updated report dated December 6, 2002, attached hereto as Appendix G (the
"Independent Engineer's Report"), evaluating the Project and the capability of
the Project participants to successfully complete the design, construction and
operation of the Project.
Under the Service Contact, the DB/Operator is required to design,
engineer, construct, operate and maintain the Service Contract Project
Improvements to be capable of processing 5.14 million gallons of groundwater per
day and the Water District has the right to demand the production and delivery
of up to 5,231 acre-feet of treated water on an annual basis, subject to the
Water District supplying sufficient groundwater to enable the DB/Operator to
produce such amount of treated water within the parameters of the DB/Operator's
performance guarantees under the Service Contract. See Appendix D--"SUMMARY OF
CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Performance." Pursuant to the
Project Implementation Agreement (San Juan Basin Desalter Project), effective as
of October 15, 2002 (the "Implementation Agreement"), by and between the
Authority and the Water District, the Authority has allocated 5,800 acre-feet
per year of the Authority's existing rights to groundwater from the San Juan
Creek to the Project, which is expected to be sufficient to enable the
DB/Operator to produce the Water District's expected demand of 4,800 acre-feet
of treated water on an annual basis but not the full 5,231 acre-feet of treated
water provided for under the Service Contract. Accordingly, to the extent
additional treated water is needed, it may be necessary for the Water District
to allocate a portion of its existing groundwater rights to the Project. See
"THE PROJECT--Project Water Rights and Implementation Agreement" and "THE WATER
DISTRICT--Sources of Water Supply."
Once constructed and fully operational, it is anticipated that the Project
will supply approximately one-half of the Water District's annual water supply
requirements and, therefore, assist the Water District in meeting its goal of
securing fifty-percent of its annual water supply from local groundwater
sources. In addition, based on current projections, the development of local
groundwater sources in connection with the operation of the Groundwater Recovery
Plant is anticipated to significantly reduce or eliminate the need for the Water
District to acquire additional import capacity and the related infrastructure
costs associated with such additional capacity as well as reduce the Water
District's need for additional storage. See "THE PROJECT--Overview."
Furthermore, the Water District anticipates that the costs associated with the
financing of the Project and the operations of such improvements will be offset
in part by certain grant credits or payments from the Metropolitan Water
District of Southern California ("MWD"). See "THE PROJECT--Agreement with
Metropolitan Water District of Southern California." Other benefits of the
Project include a reduction of the Water District's dependence on imported
water, enhanced system reliability and reduced exposure to the rising cost of
imported water. Accordingly, the Water District has determined that the Water
District's objectives justify the Project even though the costs associated with
the financing of the Project and the operations of such improvements may not be
fully offset solely by the credits from MWD. See "THE PROJECT."
The City will enter into a Property Lease, dated as of December 1, 2002
(the "Property Lease"), by and between the Authority and the City pursuant to
which it will lease to the Authority various real property sites located in San
Juan Capistrano, California, on which a portion of the Service Contract Project
Improvements are to be constructed (the "Property"). The Authority will then
sublease the Property and the improvements to be constructed thereon to the
Water District pursuant to the Lease Agreement. The Lease Agreement will
obligate the Water District to make the Lease Payments to the Authority.
Pursuant to the Trust Agreement, the Authority will assign all of its rights,
title and interest (other than certain Additional Payments) in the Lease
Agreement and the Property Lease (for so long as any Bond is Outstanding) to the
Trustee for the benefit of the Bondowners. The Lease Agreement provides that,
except with respect to certain rights of the Water District to terminate the
Lease Agreement early as permitted thereunder, the obligation of the Water
District to make the Lease Payments is absolute and unconditional and the Water
District will not discontinue or suspend any Lease Payments required to
3
be made by it thereunder when due until such time as the Lease Payments are paid
in full. For the circumstances under which the Water District may terminate the
Lease Agreement and the consequences thereof, see "SOURCES OF PAYMENT AND
SECURITY FOR THE BONDS--Water District Right to Terminate Lease" and
"DESCRIPTION OF BONDS--Redemption--Extraordinary Redemption." None of the
Property subject to the Lease Agreement or the improvements thereon or the Water
System are pledged or available to the Trustee or the Bondowners in the event of
termination of the Lease Agreement, default in the payment of Lease Payments or
otherwise, and no default under Lease Agreement will result in the loss of the
Property or the improvements thereon, the Water System or other assets of the
Water District. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Water
District Right to Terminate Lease" and "--Limited Recourse on Default."
The obligation of the Water District to make the Lease Payments and other
payments required to be made by it under the Lease Agreement is a special
obligation of the Water District payable, in the manner provided in the Lease
Agreement, solely from Revenues, and does not constitute a debt of the Water
District in contravention of any constitutional or statutory debt limitation or
restriction. Except for the pledge of Revenues pursuant to the Lease Agreement,
neither the faith and credit nor the taxing power of the Water District or the
City is pledged to the payment of the Lease Payments (and the merger of the
Water District into the City, which is expected to occur in early 2003, will not
affect this limitation). UNDER CERTAIN CIRCUMSTANCES DESCRIBED HEREIN, THE WATER
DISTRICT HAS THE RIGHT TO TERMINATE THE LEASE AGREEMENT. IN SUCH EVENT, THE
WATER DISTRICT WILL HAVE NO FURTHER OBLIGATION TO MAKE ANY LEASE PAYMENTS UNDER
THE LEASE AGREEMENT AND THE TRUSTEE WILL HAVE NO FURTHER RIGHTS OR RECOURSE WITH
RESPECT TO THE PROPERTY OR THE IMPROVEMENTS THEREON. See "SOURCES OF PAYMENT AND
SECURITY FOR THE BONDS--Water District Right to Terminate Lease" and
"DESCRIPTION OF BONDS--Redemption--Extraordinary Redemption."
THE BONDS DO NOT CONSTITUTE A CHARGE AGAINST THE GENERAL CREDIT OF THE
AUTHORITY AND ARE NOT SECURED BY A LEGAL OR EQUITABLE PLEDGE OF, OR CHARGE OR
LIEN UPON, ANY PROPERTY OF THE AUTHORITY OR ANY OF ITS INCOME OR RECEIPTS EXCEPT
THE FUNDS AND SECURITY PROVIDED UNDER THE TRUST AGREEMENT. NEITHER THE FAITH AND
CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA OR ANY PUBLIC AGENCY
THEREOF OR ANY MEMBER OF THE AUTHORITY IS PLEDGED TO THE PAYMENT OF THE
PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON, THE BONDS.
The payment of principal of and interest on the Bonds when due will be
guaranteed by a financial guaranty insurance policy (the "Policy") to be issued
by Ambac Assurance Corporation (the "Bond Insurer") simultaneously with the
delivery of the Bonds. See "SOURCES OF PAYMENT AND SECURITY FOR THE
BONDS--Financial Guaranty Insurance Policy" and Appendix H--"SPECIMEN FINANCIAL
GUARANTY INSURANCE POLICY."
This Official Statement contains forward-looking statements within the
meaning of the federal securities laws. Such statements are based on currently
available information, expectations, estimates, assumptions, projections and
general economic conditions. Such words as expects, intends, plans, believes,
estimates, anticipates or variations of such words or similar expressions are
intended to identify forward-looking statements. The forward-looking statements
are not guarantees of future performance. Actual results may vary materially
from what is contained in a forward-looking statement. The Authority and the
Water District assume no obligation to provide public updates of forward-looking
statements.
The brief descriptions of the Bonds, the Trust Agreement, the Property
Lease, the Lease Agreement, the Service Contract, the Implementation Agreement,
the Continuing Disclosure Agreement, the Insurance Agreement, and other
documents, statutes, reports and instruments included in this Official
4
Statement do not purport to be complete, comprehensive or definitive. All
references to the Trust Agreement, the Property Lease, the Lease Agreement, the
Service Contract, the Implementation Agreement, the Continuing Disclosure
Agreement, the Insurance Agreement, and any other documents, statutes, reports
and instruments, are qualified in their entirety by reference to such document,
statute, report or instrument, and all references to the Bonds are qualified in
their entirety by reference to the form thereof set forth in the Trust
Agreement. Copies of the documents are on file and available for inspection at
the office of the Trustee at 700 South Flower Street, Suite 500, Los Angeles,
California.
DESCRIPTION OF BONDS
GENERAL TERMS
The Bonds will be dated as of the date of delivery, will bear interest
from such date at the rates per annum, payable semi-annually on June 1 and
December 1 of each year, commencing June 1, 2003 (each an "Interest Payment
Date"), and will mature in the principal amounts in each year (subject to prior
redemption), as set forth on the inside front cover page hereof. Interest will
be calculated on the basis of a 360 day year of twelve 30 day months. Beneficial
ownership of the Bonds may be purchased in denominations of $5,000 or any
integral multiple thereof.
Interest on the Bonds will be payable from the preceding Interest Payment
Date to which interest was paid, provided, that Bonds registered on or prior to
May 15, 2003, will have interest payable with respect thereto from the date of
delivery of the Bonds, and Bonds registered after the fifteenth day of the
calendar month preceding an Interest Payment Date (each, a "Record Date") and on
or prior to an Interest Payment Date will have interest payable with respect
thereto from such Interest Payment Date.
The Bonds are issued only in fully registered form and, when issued, will
be registered in the name of Cede & Co., as registered owner and nominee of DTC.
DTC will act as securities depository for the Bonds. Purchasers will not receive
physical certificates representing their interest in the Bonds purchased. While
the Bonds are subject to the book-entry system, payments of principal of and
interest on the Bonds will be made by the Trustee to DTC, which in turn is
obligated to remit such principal and interest to its DTC participants for
subsequent disbursement to beneficial owners of the Bonds. See Appendix
B--"BOOK-ENTRY-ONLY SYSTEM."
REDEMPTION
Extraordinary Redemption. The Bonds are subject to redemption in whole or
in part, without premium, on any date, in the principal amount thereof to be
redeemed, together with accrued interest to the date fixed for redemption, upon
the occurrence of (i) a termination of the Lease Agreement prior to the end of
its term pursuant to the Lease Agreement (see Appendix C--"DEFINITIONS AND
SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS--LEASE
AGREEMENT--AGREEMENT OF LEASE; TERM OF LEASE; LEASE PAYMENTS--Term" and "SOURCES
OF PAYMENT AND SECURITY FOR THE BONDS--Water District Right to Terminate
Lease"), or (ii) damage, destruction or condemnation of the Service Contract
Project Improvements, or any portion thereof, which results in Net Insurance
Proceeds, to the extent required or permitted by the Lease Agreement to be
applied to prepayment of Lease Payments (see Appendix C--"DEFINITIONS AND
SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS--LEASE
AGREEMENT--INSURANCE CONDEMNATION" and "--LEASE AGREEMENT--DAMAGE, DESTRUCTION
AND EMINENT DOMAIN; USE OF NET PROCEEDS").
5
Optional Redemption. The Bonds maturing on December 1, 2013 are subject to
optional redemption prior to maturity, at the option of the Water District, as a
whole or in part on any date on or after December 1, 2012 from available funds
in the Redemption Account, at a redemption price equal to the principal amount
to be redeemed plus accrued interest to the redemption date.
Mandatory Term Bond Redemption. The Bonds maturing on December 1, 2022 are
subject to mandatory redemption, by lot, in the principal amounts hereinafter
set forth, without premium, on December 1 of each year, commencing on December
1, 2021, from the principal portion of the Lease Payments required to be on
deposit in the Debt Service Payment Account on the Lease Payment Date
immediately prior to December 1 of each of the years and in the amounts as
follows:
Year Principal Amount
---- ----------------
2021 $ 1,485,000
2022 1,560,000
The Bonds maturing on December 1, 2034 are subject to mandatory
redemption, by lot, in the principal amounts hereinafter set forth, without
premium, on December 1 of each year, commencing on December 1, 2023, from the
principal portion of the Lease Payments required to be on deposit in the Debt
Service Payment Account on the Lease Payment Date immediately prior to December
1 of each of the years and in the amounts as follows:
Year Principal Amount
---- ----------------
2023 $ 1,640,000
2024 1,720,000
2025 705,000
2026 740,000
2027 775,000
2028 815,000
2029 855,000
2030 900,000
2031 945,000
2032 990,000
2033 1,040,000
2034 1,095,000
Mandatory Redemption from Unexpended Proceeds. The Bonds are subject to
redemption, in whole or in part, without premium, on any date, in the principal
amount thereof to be redeemed, together with accrued interest to the date fixed
for redemption, from unexpended proceeds of the Bonds, if any, remaining in the
Project Account of the Project Trust Fund following Acceptance of the Service
Contract Project Improvements under the Service Contract.
Selection of Bonds to be Redeemed. If less than all of the Bonds of a
single maturity will be called for redemption, the particular Bonds or portions
thereof to be redeemed will be selected by the Trustee by lot in any manner
which the Trustee in its sole discretion will deem appropriate and fair. The
portion of any Bond of a denomination of more than $5,000 to be redeemed will be
in the principal amount of $5,000 or an integral multiple thereof, and, in
selecting portions of such Bonds for redemption, the Trustee will treat each
such Bond as representing that number of Bonds of $5,000 denomination which is
obtained by dividing the principal amount of such Bond to be redeemed in part by
$5,000. Unless the Water District directs the Trustee in writing as to any other
method of redemption, whenever provisions are made for the redemption of Bonds
in part, the Bonds to be redeemed will be redeemed from each maturity, with the
mandatory redemption schedule set forth above to be adjusted accordingly.
6
Notice of Redemption. When redemption of Bonds is required, the Trustee
will, at the expense of the Water District, give notice of the redemption of
such Bonds, the redemption date and the place or places where amounts due upon
such redemption will be payable and, if less than all of the Bonds are to be
redeemed, the letters and numbers of such Bonds so to be redeemed, and, in the
case of Bonds to be redeemed in part only, such notice will also specify the
respective portions of the principal amount thereof to be redeemed. Such notice
will further state that on such date there will become due and payable upon each
Bond to be redeemed the principal amount to be redeemed, together with interest
accrued to the redemption date, and that from and after such date interest on
the principal amount redeemed will cease to accrue and be payable. The Trustee
will mail a copy of such notice, postage prepaid, first class United States
mail, not less than 30 days and not more than 60 days before the redemption
date, to the Bondowners of any Bonds or portions of Bonds which are to be
redeemed, at their addresses as the same appear upon the registry books, but
neither the failure of a Bondowners to receive such notice nor any immaterial
defect therein will affect the validity of the proceedings for the redemption of
Bonds.
Effect of Redemption. Notice having been given and payment having been
provided for, the Bonds or portions thereof so called for redemption will become
due and payable on the redemption date so designated at the principal amount to
be redeemed plus interest accrued and unpaid to the redemption date, and, upon
presentation and surrender thereof at the office specified in such notice, such
Bonds, or portions thereof, the principal amount and interest will be paid as
provided in the Trust Agreement. If, on the redemption date, moneys for the
redemption of all the Bonds or portions thereof to be redeemed together with
interest to the redemption date will be held by the Trustee so as to be
available therefor on said date; and if notice of redemption will have been
given to the Bondowners as provided in the Trust Agreement, then from and after
the redemption date interest on the Bonds or portions thereof so called for
redemption will cease to accrue and become payable.
TRANSFER AND EXCHANGE
The following provisions regarding the transfer and exchange of the Bonds
apply only during any period in which the Bonds are not subject to the
book-entry system. While the Bonds are subject to the book-entry system, their
transfer and exchange will be effected through DTC and the DTC Participants and
will be subject to the procedures, rules and requirements established by DTC.
See Appendix B--"BOOK-ENTRY-ONLY SYSTEM."
Upon surrender of a Bond at the corporate trust office of the Trustee with
a written instrument of transfer satisfactory to the Trustee, duly executed by
the Bondowner or his duly authorized attorney, a Bond may be transferred or
exchanged by the Bondowner thereof, but only in the manner, subject to the
limitations and upon payment of the charges provided in the Trust Agreement. The
Trustee will not be required to transfer or exchange any Bonds selected for
redemption or within the 15 days before the selection of Bonds for redemption.
7
SOURCES AND USES OF FUNDS
The proceeds of the Bonds are to be applied as follows:
PROCEEDS:
Principal Amount $ 31,555,000.00
Net Original Issue Premium 960,274.40
Total Available Funds $ 32,515,274.40
================
USES:
Deposit to Project Account $ 24,825,783.83
Deposit to Reserve Account/(1)/ 2,252,537.50
Deposit to Debt Service Payment Account/(2)/ 2,086,216.95
Costs of Issuance/(3)/ 3,350,736.12
Total Amount Applied $ 32,515,274.40
================
- ----------
/(1)/ The amount on deposit in the Reserve Account equals the Reserve
Requirement as defined in the Trust Agreement. See "SOURCES OF PAYMENT AND
SECURITY FOR THE BONDS--Debt Service Reserve Account."
/(2)/ Represents capitalized interest on the Bonds in an amount expected to fund
interest through June 1, 2004.
/(3)/ Includes legal fees, financial advisor fees, rating agency fees, printing
costs, the underwriter's discount (see "UNDERWRITING"), premium for the
Policy and other expenses.
[Remainder of page intentionally left blank.]
8
DEBT SERVICE SCHEDULE
The following table shows the debt service requirements for the Bonds.
YEAR ENDING
(DECEMBER 31) INTEREST PRINCIPAL TOTAL DEBT SERVICE
- ------------- --------------- ------------- ------------------
2003 $ 1,339,658.20 $ -- $ 1,339,658.20
2004 1,493,117.50 -- 1,493,117.50
2005 1,493,117.50 755,000 2,248,117.50
2006 1,470,467.50 780,000 2,250,467.50
2007 1,447,067.50 805,000 2,252,067.50
2008 1,422,917.50 825,000 2,247,917.50
2009 1,398,167.50 850,000 2,248,167.50
2010 1,364,167.50 885,000 2,249,167.50
2011 1,328,767.50 920,000 2,248,767.50
2012 1,295,647.50 955,000 2,250,647.50
2013 1,260,312.50 990,000 2,250,312.50
2014 1,210,812.50 1,040,000 2,250,812.50
2015 1,156,212.50 1,095,000 2,251,212.50
2016 1,098,725.00 1,150,000 2,248,725.00
2017 1,038,350.00 1,210,000 2,248,350.00
2018 974,825.00 1,275,000 2,249,825.00
2019 907,887.50 1,340,000 2,247,887.50
2020 837,537.50 1,415,000 2,252,537.50
2021 763,250.00 1,485,000 2,248,250.00
2022 689,000.00 1,560,000 2,249,000.00
2023 611,000.00 1,640,000 2,251,000.00
2024 529,000.00 1,720,000 2,249,000.00
2025 443,000.00 705,000 1,148,000.00
2026 407,750.00 740,000 1,147,750.00
2027 370,750.00 775,000 1,145,750.00
2028 332,000.00 815,000 1,147,000.00
2029 291,250.00 855,000 1,146,250.00
2030 248,500.00 900,000 1,148,500.00
2031 203,500.00 945,000 1,148,500.00
2032 156,250.00 990,000 1,146,250.00
2033 106,750.00 1,040,000 1,146,750.00
2034 54,750.00 1,095,000 1,149,750.00
SOURCES OF PAYMENT AND SECURITY FOR THE BONDS
SOURCE OF PAYMENT
The Bonds are special, limited obligations of the Authority payable solely
from the Trust Estate. The Bonds do not constitute a charge against the general
credit of the Authority and are not secured by a legal or equitable pledge of,
or charge or lien upon, any property of the Authority or any of its income or
receipts except the funds and security provided under the Trust Agreement.
Neither the faith and credit nor the taxing power of the State of California or
any public agency thereof or any member of the Authority is pledged to the
payment of the principal of, premium, if any, or interest on, the Bonds.
9
The Trust Estate is defined in the Trust Agreement to mean all right,
title and interest of the Trustee in and to the Trustee benefit provisions under
the Service Contract described under the heading entitled "--Water District
Right to Terminate Lease--Bond Insurer Notice and Cure Provisions," all amounts
received by the Trustee for the account of the Water District pursuant to or
with respect to the Service Contract Letter of Credit (see "--Service Contract
Letter of Credit" below) and the Lease Agreement including, without limitation,
the Lease Payments and all amounts from time to time deposited in the funds,
accounts and subaccounts created pursuant to the Trust Agreement, including all
investments and investment earnings thereon, excluding, however, all moneys
deposited or required to be deposited in the Rebate Fund.
LEASE PAYMENTS
The Water District is obligated to make the Lease Payments to the
Authority solely from Revenues of the Water District pledged to the payment of
the Lease Payments pursuant to the Lease Agreement. Pursuant to the Trust
Agreement, the Authority has assigned all of its rights, title and interest
(other than certain Additional Payments) in the Lease Agreement, including its
right to receive the Lease Payments, and the right to exercise any remedies
provided therein in the event of a default by the Water District thereunder, to
the Trustee for the benefit of the Bondowners. Pursuant to the Lease Agreement,
the Authority directs the Water District, and the Water District agrees, to pay
to the Trustee all Lease Payments or prepayments thereof payable by the Water
District under the Lease Agreement. None of the Property subject to the Lease
Agreement or the improvements thereon or the Water System are pledged or
available to the Trustee or the Bondowners in the event of termination of the
Lease Agreement, default in the payment of Lease Payments or otherwise, and no
default under Lease Agreement will result in the loss of the Property or the
improvements thereon, the Water System or other assets of the Water District.
See "--Water District Right to Terminate Lease" and "--Limited Recourse on
Default" below.
Notwithstanding any dispute between the Authority and the Water District,
the Water District agrees in the Lease Agreement to make all Lease Payments when
due and not to withhold any Lease Payment pending the final resolution of such
dispute. The Lease Agreement provides that, except with respect to certain
rights of the Water District to terminate the Lease Agreement early (See
"--Water District Right to Terminate Lease" immediately below), the obligation
of the Water District to make the Lease Payments is absolute and unconditional
until such time as the Lease Payments are paid in full (or provision for the
payment thereof is made pursuant to the Lease Agreement), the Water District
will not discontinue or suspend any Lease Payments or Additional Payments
required to be made by it under the Lease Agreement when due, whether or not the
Water System or any part thereof is operating or operable or its use is
suspended, interfered with, reduced or curtailed or terminated in whole or in
part, and such payments will not be subject to reduction whether by offset or
otherwise and will not be conditional upon the performance or nonperformance by
any party of any agreement for any cause whatsoever. In the event the Water
District should fail to make any Lease Payment required by the Lease Agreement,
or any portion of any such Lease Payment, the Lease Agreement provides that the
Lease Payment or portion in default will continue as an obligation of the Water
District until the amount in default is fully paid, and that the Water District
agrees to pay the same with interest thereon, to the extent permitted by law,
from the date such amount was originally payable at the rate equal to the
highest stated interest rate on any of the Bonds as stated in the Trust
Agreement.
The obligation of the Water District to make the Lease Payments and other
payments required to be made by the Water District under the Lease Agreement is
a special obligation of the Water District payable, in the manner provided in
the Lease Agreement, solely from Revenues. Except for the pledge of Revenues
pursuant to the Lease Agreement, neither the faith and credit nor the taxing
power of the Water District or the City is pledged to the payment of the Lease
Payments (and the merger of the Water District into the City, which is expected
to occur in early 2003, will not affect this limitation). See "--Pledge of
Revenues" below. UNDER CERTAIN CIRCUMSTANCES DESCRIBED HEREIN, THE WATER
10
DISTRICT HAS THE RIGHT TO TERMINATE THE LEASE AGREEMENT. IN SUCH EVENT, THE
WATER DISTRICT WILL HAVE NO FURTHER OBLIGATION TO MAKE ANY LEASE PAYMENTS UNDER
THE LEASE AGREEMENT AND THE TRUSTEE WILL HAVE NO FURTHER RIGHTS OR RECOURSE WITH
RESPECT TO THE PROPERTY OR THE IMPROVEMENTS THEREON. See "--Water District Right
to Terminate Lease" immediately below and "DESCRIPTION OF BONDS--Redemption--
Extraordinary Redemption."
WATER DISTRICT RIGHT TO TERMINATE LEASE
Water District Right to Terminate Lease as a Result of DB/Operator Default
under Service Contract; Water District Lockout. Under the Service Contract, the
DB/Operator is required to complete the Service Contract Project Improvements
for a fixed price of $25,030,607 and by the Scheduled Acceptance Date, September
1, 2004, as such date may be extended upon the occurrence of an Uncontrollable
Circumstance, Water District requested changes or District Fault, and once
completed, operate such Service Contract Project Improvements, subject to the
conditions and performance guarantees set forth in the Service Contract. The
DB/Operator's obligations under the Service Contract are described in Appendix
D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT." In the event certain
events of default by the DB/Operator under the Service Contract occur that
continue beyond any applicable cure period, the Water District has the right,
subject to the limitations in the Service Contract described below, to terminate
the Lease Agreement. The Water District has the right to terminate the Lease
Agreement in the event it exercises its right to terminate the Service Contract
(i) without any requirement of having given notice previously or of providing
any further or additional cure opportunity, in the event the DB/Operator fails
to achieve satisfaction of all of the Acceptance Date Conditions specified in
the Service Contract (see Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE
SERVICE CONTRACT--Provisional Acceptance, Acceptance and Final Completion of the
Project--Acceptance Date Conditions") by the end of the Extension Period, March
2, 2006, as such date may be extended by the occurrence of Uncontrollable
Circumstances, Water District requested changes or District Fault, or (ii)
subject to the notice and cure provisions described below, in the event any
Payment/Performance Default (defined below) by the DB/Operator occurs. See
Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Breach,
Default, Remedies and Termination." For information regarding the allocation of
the days to remedy any failure to achieve Provisional Acceptance on or before
the Scheduled Acceptance Date during the Extension Period between the
DB/Operator and the Bond Insurer pursuant to the Insurance Agreement, see also
"--Insurance and Indemnity Agreement and Insurance Agreement Guaranty." If the
Water District exercises its right to so terminate the Lease Agreement, the
Lease Agreement will terminate, the Trustee will have no further rights or
recourse with respect to the Property or the improvements thereon and the Water
District will have no further obligation to make any Lease Payments under the
Lease Agreement. See "DESCRIPTION OF BONDS--Redemption--Extraordinary
Redemption."
In the event of a Payment/Performance Default, however, the DB/Operator
and the Bond Insurer (or the Trustee if the Bond Insurer is in default under the
Policy) will have a reasonable period of time (which shall not in any event
exceed 120 days plus an additional 120 to 350 days, for a maximum combined total
of 470 days) to cure such default (so long as they diligently carry out such
cure and satisfy certain other requirements (see "--Bond Insurer Notice and Cure
Provisions--Continuing Performance Obligations; Obligation to Pay Liquidated
Damages" below)), during which time the Water District, subject to certain
conditions, is obligated to continue to make the Lease Payments. See
"--DB/Operator Notice and Cure Provisions" and "--Bond Insurer Notice and Cure
Provisions" below. For information regarding the Bond Insurer's right to pursue
certain cure rights during the DB/Operator's cure period and the tolling of all
cure periods during certain bankruptcy or similar proceedings pursuant to the
Insurance Agreement, see also "--Insurance and Indemnity Agreement and Insurance
Agreement Guaranty." Furthermore, pursuant to the Lease Agreement, the Property
Lease and the Insurance Agreement (see "--Insurance and Indemnity Agreement and
Insurance Agreement Guaranty" below), the Water District, the
11
Authority and the City will agree that upon the occurrence of a termination of
the Lease Agreement as a result of a termination of the Service Contract caused
by a Payment/Performance Default by the DB/Operator (a "Termination Event"), the
Water District will not have the right to construct, operate or otherwise use
(except for maintenance by the Water District, the Authority or the City) the
Project for a three-year period from the date of such Termination Event (the
"Lock-out Period"), except with the prior written approval of the Bond Insurer.
In addition, the Water District will agree that, to the extent permitted by law,
it will not develop or construct Alternative Facilities during any cure period
following an event of default under the Service Contract or during any Lock-out
Period, if applicable, without the prior written consent of the Bond Insurer.
The Lease Agreement does not terminate on expiration of the Service Contract at
the end of its term or as a result of a buy-out of the Service Contract by the
Water District. See Appendix C--"DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS
OF PRINCIPAL FINANCING DOCUMENTS--LEASE AGREEMENT--AGREEMENT OF LEASE; TERM OF
LEASE; LEASE PAYMENTS--Term."
The term "Alternative Facilities" is defined in the Lease Agreement to
mean any new water storage and production facilities that would in the aggregate
supply more than three million gallons per day of potable water; provided,
however, that Alternative Facilities shall not include any wells that exist on
the date of issuance of the Bonds, any facilities for the importation or
transmission of local water sources delivered by wholesale water agencies to the
Water District or other generation, storage and production sources developed by
the Water District in the course of its ongoing program to develop local water
supply infrastructure, including without limitation for reclaimed water, prior
to any event of default under the Service Contract and not in view of the
termination of the Lease Agreement."
Under the Service Contract, a "Payment/Performance Default" occurs if the
DB/Operator fails, refuses or otherwise defaults in its duty (i) to pay any
amount required to be paid to the Water District under the Service Contract
within 60 days following the due date for such payment, or (ii) to perform any
material obligation under the Service Contract (unless such default is excused
by an Uncontrollable Circumstance or District Fault as and to the extent
provided in the Service Contract). See Appendix D--"SUMMARY OF CERTAIN
PROVISIONS OF THE SERVICE CONTRACT--Breach, Default, Remedies and Termination."
DB/Operator Notice and Cure Provisions. No Payment/Performance Default
under the Service Contract will constitute an event of default giving the Water
District the right to terminate the Service Contract, and, as a result, the
Lease Agreement, unless (y) the Water District has given prior written notice to
the DB/Operator stating that in its opinion a specified Payment/Performance
Default in the DB/Operator's duty to pay or perform exists which gives the Water
District a right to terminate the Service Contract for cause, and describing the
Payment/Performance Default in reasonable detail; and (z) the DB/Operator
neither challenged in an appropriate forum the Water District's conclusion that
such a failure or refusal to perform has occurred or constitutes a material
breach of the Service Contract, nor initiated within a reasonable time (in any
event not more than 30 days from the initial default notice) and continued with
due diligence to carry out to completion all actions reasonably necessary to
correct the default and prevent its recurrence; except that if the DB/Operator
will have initiated within such reasonable time and continued with due diligence
to carry out to completion all such actions, the Payment/Performance Default
will not constitute such an event of default during such period of time (in any
event not more than 120 days from the initial default notice) as the DB/Operator
continues with due diligence to carry out to completion all such actions. For
information regarding the Bond Insurer's right to pursue certain cure rights
during the DB/Operator's cure period and the tolling of all cure periods during
certain bankruptcy or similar proceedings pursuant to the Insurance Agreement,
see also "--Insurance and Indemnity Agreement and Insurance Agreement Guaranty."
12
Bond Insurer Notice and Cure Provisions. The Service Contract provides
that, during the Lease Term, the Bond Insurer (or the Trustee if the Bond
Insurer is in default under the Policy) will be entitled to the protections set
forth below if the Bond Insurer (or the Trustee if the Bond Insurer is in
default under the Policy) has (i) provided the Water District with an address
for notices under the Service Contract, (ii) acknowledged the Water District's
rights with respect to the DB/Operator, the Trustee and the Project, and (iii)
paid any non-performance liquidated damages to the Water District which are due
and owing by the DB/Operator. For a discussion of certain of such
non-performance liquidated damages, see "THE PROJECT--Liquidated Damages under
the Service Contract."
Default Notice. During the Lease Term, should any event of default by the
DB/Operator under the Service Contract occur, the Water District is required to
mail or deliver to the Bond Insurer (or the Trustee if the Bond Insurer is in
default under the Policy) a duplicate copy of any and all notices in writing
that the Water District may from time to time give to or serve upon the
DB/Operator pursuant to the provisions of the Service Contract. The Service
Contract provides that any such notice will set forth the nature of the event of
default and the actions required to cure such event of default. The Service
Contract provides that each such notice will be mailed or delivered to the Bond
Insurer (or the Trustee if the Bond Insurer is in default under the Policy) at
or as near as possible to the time such notices are given to or served upon the
DB/Operator by the Water District if required to be so served or at the earliest
opportunity if such notice is not required to be given to the DB/Operator. No
notice by the Water District to the DB/Operator will be deemed to be given to
the DB/Operator unless and until a copy thereof has been mailed or delivered to
the Bond Insurer (or the Trustee if the Bond Insurer is in default under the
Policy).
Bond Insurer Right of Cure for Payment/Performance Defaults. If a default
by the DB/Operator occurs under the Service Contract which, with the giving of
notice or the passage of time, may lead to a Payment/Performance Default, and
the DB/Operator has failed to cure such default on or before the expiration of
any applicable period of cure for such a default as described above under the
heading entitled "--DB/Operator Notice and Cure Provisions," the Bond Insurer
(or the Trustee if the Bond Insurer is in default under the Policy) will have
120 days after the later of the expiration of the DB/Operator's cure period with
respect to such Payment/Performance Default, or the date of the Bond Insurer's
(or the Trustee's if the Bond Insurer is in default under the Policy) receipt of
written notice of the occurrence of the Payment/Performance Default from the
Water District, and an additional 230 day period of time after the expiration of
such 120 day period within which to remedy such default; provided that the Bond
Insurer (or the Trustee if the Bond Insurer is in default under the Policy) will
(i) have fully cured any default in the payment of any monetary obligations of
the DB/Operator under the Service Contract within such 120 day period and will
continue to pay current such monetary obligations as and when they are due, (ii)
will have commenced action to cure any nonmonetary default within such 120 day
period, and (iii) will thereafter diligently prosecute such action or proceeding
to completion by no later than 350 days of the Bond Insurer's (or the Trustee's
if the Bond Insurer is in default under the Policy) receipt of such notice from
the Water District. For information regarding the Bond Insurer's right to pursue
certain cure rights during the DB/Operator's cure period and the tolling of all
cure periods during certain bankruptcy or similar proceedings pursuant to the
Insurance Agreement, see also "--Insurance and Indemnity Agreement and Insurance
Agreement Guaranty." The Bond Insurer (or the Trustee if the Bond Insurer is in
default under the Policy) will be entitled to cure certain other defaults that
do not in and of themselves give rise to a Termination Event. See Appendix
D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Breach, Default,
Remedies and Termination." The Service Contract provides that all rights of the
Water District during the term of the Lease Agreement to terminate the Service
Contract as a result of the occurrence of any event of default by the
DB/Operator thereunder will be subject to and conditioned upon the Water
District having first given to the Bond Insurer (or the Trustee if the Bond
Insurer is in default under the Policy) written notice of such default as
specified in the Service Contract and the Bond Insurer (or the Trustee if the
Bond Insurer is in default
13
under the Policy) having failed to act within the time specified in the Service
Contract for the Bond Insurer (or, if applicable, the Trustee) to cure such
default.
Assignment. During any cure period described under the heading entitled
"--Bond Insurer Right of Cure for Payment/Performance Defaults" above, the Bond
Insurer (or the Trustee if the Bond Insurer is in default under the Policy) will
have the right to assign (and the DB/Operator in such circumstances agrees to
the assignment of) the DB/Operator's rights and obligations under the Service
Contract to any replacement operator recognized as competent in the water
treatment industry and as being technically and financially capable of carrying
out both the DB/Operator's obligations under the Service Contract and the
Guarantor's obligations under the Service Contract Guaranty Agreement for the
remaining term of the Service Contract. Any such replacement operator will be
subject to the approval of the Water District, which approval will be based on
the standards set forth in the preceding sentence and will not unreasonably be
withheld. No such assignment will take place unless and until the replacement
operator has executed and delivered to the Water District an agreement
acknowledging and confirming its assumption of all of the DB/Operator's
obligations under the Service Contract, together with all authorizing
documentation. The Water District has agreed to fully cooperate with the Bond
Insurer, as requested by the Bond Insurer, in all reasonable respects to assist
the Bond Insurer in identifying and engaging a replacement operator pursuant to
the Service Contract.
New Agreement Upon Rejection in Bankruptcy. The Service Contract provides
that if the Service Contract is rejected or disaffirmed by or on behalf of the
DB/Operator in a proceeding under the Bankruptcy Code or other insolvency law
then, unless the Service Contract has theretofore been terminated, on written
request of the Bond Insurer (or the Trustee if the Bond Insurer is in default
under the Policy) made at any time within 60 days after the date on which notice
of such rejection or disaffirmance is given, the Water District will enter into
a new agreement with respect to the Project with a designee of the Bond Insurer
(or the Trustee if the Bond Insurer is in default under the Policy) meeting the
requirements described under the heading entitled "--Assignment" above for a
replacement operator. The Service Contract provides that a new agreement will be
effective as of the effective date of such rejection or disaffirmance of the
Service Contract, for the term of the Service Contract remaining as of the
effective date of such rejection or disaffirmance, and upon the same executory
terms, covenants, conditions and agreements as are contained in the Service
Contract; provided, however, that the Water District will not be so obligated
unless (i) such designee will execute and deliver such new agreement within 20
days after the later of the date on which the Bond Insurer (or the Trustee if
the Bond Insurer is in default under the Policy) gives the Water District notice
of its election to do so or the date on which the Water District tenders such
new agreement to such designee for execution, and (ii) the Bond Insurer (or the
Trustee if the Bond Insurer is in default under the Policy) or its designee will
pay to the Water District at the time of the execution and delivery of such new
agreement all expenses, including reasonable attorney's fees, incurred by the
Water District in connection with the termination of the Service Contract and
the execution and delivery of such new agreement.
Continuing Performance Obligations; Obligation to Pay Liquidated Damages.
The Service Contract provides that the rights of the Bond Insurer (or the
Trustee if the Bond Insurer is in default under the Policy) to cure an event of
default by the DB/Operator and to appoint a replacement operator will not
relieve the DB/Operator or any such replacement operator from its continuing
obligation to perform under the Service Contract, and that the Bond Insurer's
(or the Trustee's if the Bond Insurer is in default under the Policy) cure and
notice rights are subject to the timely payment and performance by the Bond
Insurer (or the Trustee if the Bond Insurer is in default under the Policy) or
another entity as arranged for by the Bond Insurer (or the Trustee, as
applicable), on behalf of the DB/Operator, of all non-performance liquidated
damages and other obligations which are to be performed or paid by the
DB/Operator to the Water District under the Service Contact and which remain
unperformed or unpaid as of the due date. For a discussion of certain of such
non-performance liquidated damages, see "THE PROJECT--Liquidated Damages under
the Service Contract."
14
SERVICE CONTRACT LETTER OF CREDIT
The Service Contract provides that, in the event that Provisional
Acceptance of the Service Contract Project Improvements under the Service
Contract (or, if Provisional Acceptance is not certified by the DB/Operator,
Acceptance) occurs subsequent to December 4, 2004, the DB/Operator will pay to
the Water District daily delay liquidated damages for each day that the
Provisional Acceptance Date (or, if Provisional Acceptance is not certified by
the DB/Operator, the Acceptance Date) falls after December 4, 2004 in an amount
equal to the Lease Payments (including payments with respect to both interest
and principal) accrued by the Water District on a daily basis, up to the end of
the Extension Period and thereafter until any termination of the Service
Contract for an event of default by the DB/Operator under the Service Contract.
The Service Contract provides that the accrual of such Lease Payments will be
determined on the basis of the amount of the Lease Payments actually payable
under the Lease Agreement, whether such payments are in fact made by the Water
District directly or from proceeds of the Bonds borrowed in order to capitalize
interest. See Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE
CONTRACT--Provisional Acceptance, Acceptance and Final completion of the
Project--Daily Liquidated Damages." See also Section 7.3 of the Independent
Engineer's Report entitled "--Service Contract" attached hereto as Appendix G.
The Service Contract provides that such damages will be payable on the
first day of each month and the date of termination of the Service Contract (if
the Service Contract is terminated by the Water District on account of default
by the DB/Operator). The Service Contract provides that such liquidated damages
will be secured by an irrevocable direct pay letter of credit in a stated amount
of $3,430,000, equal to daily accrued debt service on the Bonds for a period of
547 days, issued by a United States bank whose long-term debt is rated "A" or
better by either Moody's Investors Service ("Moody's") or Standard & Poor's
Credit Markets Services, a Division of The McGraw-Hill Companies ("Standard &
Poor's"), and which maintains a banking office in the State (the "Service
Contract Letter of Credit"). Notwithstanding any provision of the Service
Contract to the contrary, pursuant to the Insurance Agreement, from and after
the assignment of the Service Contract and the Insurance Agreement by the
Company to the SPE, the Service Contract Letter of Credit (and any replacements
thereof) will secure the obligations of the Guarantor under the Service Contract
Guaranty Agreement (including the guaranty of the Company's obligations to pay
daily delay liquidated damages to the Water District in accordance with the
Service Contract) to guarantee the Company's performance of the Contract
Services (as defined in the Service Contract) rather than directly securing the
obligations of the Company under the Service Contract. The Service Contract
Letter of Credit will be initially provided by Bank of America, N.A. (the
"Service Contract Letter of Credit Provider"). For information regarding the
Service Contract Letter of Credit Provider, see Appendix J--"CERTAIN INFORMATION
CONCERNING THE SERVICE CONTRACT LETTER OF CREDIT PROVIDER." The Service Contract
Letter of Credit will be for a term of one year, will be continuously renewed,
extended or replaced so that it remains in effect until thirty days after the
date that the Water District states in writing that the Water District and the
Independent Engineer concur with the DB/Operator's certification that Acceptance
has occurred under the Service Contract. THE SERVICE CONTRACT LETTER OF CREDIT
WILL BE ISSUED TO THE WATER DISTRICT. HOWEVER, UNDER THE TRUST AGREEMENT, THE
WATER DISTRICT WILL COVENANT TO TRANSFER TO THE TRUSTEE, FOR DEPOSIT INTO THE
DEBT SERVICE PAYMENT ACCOUNT ESTABLISHED UNDER THE TRUST AGREEMENT, NO LATER
THAN THREE BUSINESS DAYS FOLLOWING RECEIPT THEREOF BY THE WATER DISTRICT, ALL
PROCEEDS OF ANY DRAWING ON THE SERVICE CONTRACT LETTER OF CREDIT RECEIVED BY THE
WATER DISTRICT. The DB/Operator may reduce and replace the Service Contract
Letter of Credit on the sixth and twelve month anniversary dates of the
Scheduled Acceptance Date by an amount equal to all daily delay liquidated
damages that the DB/Operator then shall have previously paid to the Water
District.
15
ADDITIONAL PAYMENTS
The Lease Agreement provides that, in addition to the Lease Payments, the
Water District will also pay such amounts ("Additional Payments") as are
required for the payment of all administrative costs of the Authority relating
to the Property, including, without limitation, all expenses including usual and
ordinary legal fees and expenses, assessments, compensation and indemnification
of the Authority and the Trustee, any amounts required to be rebated to the
federal government in order to comply with the provisions of Section 148 of the
Internal Revenue Code of 1986, as amended, any amounts required to be paid to
the Trustee to replenish the Reserve Account to the Reserve Requirement, fees
under any Alternative Reserve Account Security, taxes of any sort whatsoever
payable by the Authority as a result of its lease of the Property or undertaking
of the transactions contemplated in the Lease Agreement or in the Trust
Agreement, fees of auditors, accountants, attorneys or engineers, insurance
premiums required by the Lease Agreement, certain repair and maintenance costs,
taxes and assessments and utility charges required by the Lease Agreement and
all other necessary administrative costs of the Authority or charges required to
be paid by it in order to comply with the terms of the Bonds or of the Trust
Agreement or to indemnify the Trustee and its officers and directors. All such
Additional Payments are to be paid when due directly by the Water District to
the respective parties to whom such Additional Payments are owing.
LIMITED RECOURSE ON DEFAULT
The Lease Agreement provides that whenever any Event of Default under the
Lease Agreement by the Water District will have happened and be continuing, it
will be lawful for the Authority to exercise (subject to the restrictions
described below) any and all remedies available pursuant to law or equity or
granted pursuant to the Lease Agreement, and, in each and every such case during
the continuance of such an Event of Default, the Authority may, with the consent
of the Bond Insurer, and will, at the direction of the Bond Insurer, declare the
entire principal amount of the unpaid Lease Payments and the accrued interest
thereon to be due and payable immediately, and upon any such declaration the
same will become immediately due and payable, anything contained in the Lease
Agreement to the contrary notwithstanding. However, the Water District has no
ability to accelerate Revenues, and the amount of Revenues pledged to the
payment of the Lease Payments on a basis that is senior to certain other
obligations of the Water District is subject to certain annual dollar
limitations. See "--Pledge of Revenues" below. Furthermore, the Lease Agreement
provides that none of the Authority, the Trustee, the Bond Insurer, or the
Bondowners have the right under the Lease Agreement to re-enter or re-let the
Property or the improvements thereon under any circumstances, and neither the
Authority nor the Trustee has a security interest in or mortgage on or other
recourse to the Property subject to the Lease Agreement or the improvements
thereon, the Water System or other assets of the Water District and no default
under Lease Agreement will result in the loss of the Property or the
improvements thereon, the Water System, or other assets of the Water District.
The Lease Agreement also provides that if at any time after the entire
principal amount of the unpaid Lease Payments and the accrued interest thereon
will have been so declared due and payable and before any judgment or decree for
the payment of the moneys due will have been obtained or entered the Water
District will deposit with the Authority a sum sufficient to pay the unpaid
principal amount of the Lease Payments due prior to such declaration and the
accrued interest thereon, with interest on such overdue installments, at the
rate or rates applicable to the remaining unpaid principal balance of the Lease
Payments, and the reasonable expenses of the Authority, and any and all other
defaults known to the Authority (other than in the payment of the entire
principal amount of the unpaid Lease Payments and the accrued interest thereon
due and payable solely by reason of such declaration) will have been made good
or cured to the satisfaction of the Authority or provision deemed by the
Authority to be adequate will have been made therefor, then and in every such
case the Authority, by written notice to the Water District may rescind and
annul such declaration and its consequences; but no such rescission and
annulment will extend to or will affect any subsequent default or will impair or
exhaust any right or
16
power consequent thereon. The Lease Agreement provides that upon the occurrence
and continuance of any such Event of Default, so long as the Bond Insurer is not
in default under the Policy, the Bond Insurer will be entitled to control and
direct the enforcement of all rights and remedies granted to the Authority or
the Trustee under the Lease Agreement or otherwise available to the Authority or
the Trustee, including, without limitation (i) the right to accelerate the
portion of each Lease Payment designated as and representing the principal of
the Bonds, and (ii) the right to annul any declaration of acceleration, and the
Bond Insurer will also be entitled to approve all waivers of Events of Default.
PLEDGE OF REVENUES
Pursuant to the Lease Agreement, the Water District has unconditionally
pledged the Revenues of the Water District to the payment of the Lease Payments.
Furthermore, subject to the Maintenance and Operation Cap described below, the
Water District agrees in the Lease Agreement that such pledge is senior to its
pledge of net revenues to the payment of the installment payments of interest
and principal (the "Installment Payments") scheduled to be paid by the Water
District under and pursuant to the Installment Purchase Agreement, dated as of
March 1, 2002 (the "Installment Purchase Agreement"), by and between the Water
District and the San Juan Capistrano Public Financing Authority. See "WATER
DISTRICT FINANCIAL INFORMATION--Outstanding Indebtedness."
The Water District entered into the Installment Purchase Agreement in
connection with the execution and delivery of $8,525,000 aggregate principal
amount of revenue certificates of participation executed and delivered on April
3, 2002 (the "2002 Certificates of Participation"). Pursuant to the Installment
Purchase Agreement, the Revenues of the Water District are pledged to pay the
Installment Payments net of operation and maintenance costs, defined in the
Installment Purchase Agreement to include, in part, annual costs not to exceed
(i) $2,750,000 for project lease payments, including principal and interest
components for the Groundwater Recovery Plant; plus (ii) $1,100,000 for other
capital and operations costs of the Groundwater Recovery Plant, increasing by
85% of CPI annually; plus (iii) $1,200,000 for electricity costs of the
Groundwater Recovery Plant, provided that (i), (ii) and (iii) above may be
increased due to currently unforeseeable cost increases which are out of the
control of the Water District and of the owner, operator and lenders with
respect to the Groundwater Recovery Plant (the limitations relating to project
lease payments as further defined in the Lease Agreement, the "Maintenance and
Operation Cap"). The Lease Agreement provides that the Lease Payments are, and
are deemed to be, for all purposes of the Installment Purchase Agreement, the
project lease payments included in operation and maintenance costs under the
Installment Purchase Agreement and constitute Maintenance and Operation Costs
for purposes of the Lease Agreement, and, as such, are payable, to the extent
the Lease Payments due in such year do not exceed the dollar limitations under
the Maintenance and Operation Cap described above, from Revenues on a senior
lien basis to the Installment Payments. To the extent the Lease Payments due in
any one year exceed the dollar limitations under the Maintenance and Operation
Cap described above due to the acceleration of such payments or otherwise, the
Lease Agreement provides that such payments would be payable from Net Revenues
on a parity lien basis to the Installment Payments. See also "--Limited Recourse
on Default" above and "--Additional Obligations; Parity Obligations" below. The
Water District has covenanted in the Lease Agreement not to make any changes in
the Installment Purchase Agreement or otherwise that would impair the priority
of the pledge of the Revenues of the Water District to the payment of the Lease
Payments and that such priority will survive any payment or defeasance of the
Installment Purchase Agreement or the 2002 Certificates of Participation.
"Revenues" is defined in the Lease Agreement to mean all income, rents,
rates, fees, charges and other moneys derived from the ownership or operation of
the Water System, including, without limiting the generality of the foregoing,
(i) all income, rents, rates, fees, charges, business interruption insurance
proceeds or other moneys derived by the Water District from the sale, furnishing
and supplying of the water or other services, facilities, and commodities sold,
furnished or supplied through the facilities of or
17
in the conduct or operation of the business of the Water System; (ii) the
earnings on and income derived from the investment of amounts described in
clause (i) above and from Water District reserves; and (iii) the proceeds
derived by the Water District directly or indirectly from the sale, lease or
other disposition of a part of the Water System; and (iv) payments under the
Metropolitan Agreement; but excluding (a) customers' deposits or any other
deposits or advances subject to refund until such deposits or advances have
become the property of the Water District; and (b) any proceeds of taxes or
assessments restricted by law to be used by the Water District to pay bonds or
other obligations heretofore or hereafter issued. Revenues also include all
amounts transferred from the Lease Revenue Bonds Rate Stabilization Reserve to
the Revenue Fund of the Water District during any Fiscal Year in accordance with
the Lease Agreement. For information regarding the Lease Revenue Bonds Rate
Stabilization Reserve, see "--Lease Revenue Bonds Rate Stabilization Reserve;
Impact of Proposition 218" below. For information regarding the Water District,
including certain financial information, see "THE WATER DISTRICT" and "WATER
DISTRICT FINANCIAL INFORMATION."
"Net Revenues" is defined in the Lease Agreement to mean the amounts of
Revenues of the Water System remaining after payment therefrom of the
Maintenance and Operation Costs.
"Maintenance and Operation Costs" is defined in the Lease Agreement to
mean costs spent or incurred for operation and maintenance of the Water System
calculated in accordance with generally accepted accounting principles,
including (among other things) the reasonable expenses of management and repair
and other expenses necessary to maintain and preserve the Water System in good
repair and working order, and also all costs of water purchased or otherwise
acquired for delivery by the Water System (including the Lease Payments, any
Parity Obligations, and any interim or renewed arrangement for water purchase or
acquisition); but excluding in all cases depreciation, replacement and
obsolescence charges or reserves therefor and amortization of intangibles or
other bookkeeping entries of a similar nature and any amounts transferred to the
Lease Revenue Bonds Rate Stabilization Reserve.
For information regarding certain rights of the Water District to receive
grant credits or payments from MWD in connection with the development of the
Project, see "THE PROJECT--Agreement with Metropolitan Water District of
Southern California." See also "THE PROJECT--Liquidated Damages under the
Service Contract" for information regarding the obligation of the DB/Operator to
pay certain non-performance liquidated damages to the Water District.
REVENUE FUND
The Water District accounts for its water operations through an enterprise
fund currently identified as the Unrestricted Fund of the Water District (the
"Revenue Fund"). The Revenue Fund is held separate and apart from other funds of
the Water District. The Revenue Fund is invested in accordance with the Water
District's investment policy. See "WATER DISTRICT FINANCIAL
INFORMATION--Investment of Water District Funds."
The Water District agrees and covenants under the Lease Agreement that all
Revenues will be deposited in the Revenue Fund. The Lease Agreement provides
that the Water District will transfer moneys from the Revenue Fund to pay
Maintenance and Operation Costs, including the Lease Payments in accordance with
the Lease Agreement and lease payments securing Parity Obligations, if any, and
that any Revenues in excess of the amounts budgeted, as required, for the
payment of the Lease Payments and Maintenance and Operation Costs will
constitute surplus revenues in the Revenue Fund and that such surplus revenues
may be used for (i) payment of the Installment Payments, (ii) extensions and
betterments of the Water System or (iii) any lawful purpose of the Water
District.
18
ADDITIONAL OBLIGATIONS; PARITY OBLIGATIONS
The Water District covenants in the Lease Agreement that no additional
bonds, notes or obligations will be issued by the Water District which will have
any priority in payment of principal or interest out of the Revenues over the
Lease Payments. The Water District further covenants in the Lease Agreement
that, except for obligations issued to prepay the Lease Payments, it will issue
obligations payable from Revenues on a parity basis with the Lease Payments
("Parity Obligations") only provided that certain conditions are met, including
the requirements (i) that the Revenues as shown by the books of the Water
District for the twelve calendar months ending prior to the incurring of such
additional obligations will have amounted to at least the sum of (x) one hundred
percent of Maintenance and Operation Costs, including without limitation the
Lease Payments, for such twelve calendar month period, plus (y) the amount by
which the amount on deposit on the Lease Revenue Bonds Rate Stabilization
Reserve on the date prior to the first day of such twelve calendar month period
was less than twenty-five percent of Maximum Annual Debt Service, and (ii) that
the estimated Revenues for the twelve calendar months following the date of
incurring such Parity Obligations will be at least equal to one hundred percent
of all Maintenance and Operation Costs, including without limitation the Lease
Payments projected to be paid in the next succeeding Fiscal Year and payments on
Parity Obligations to be outstanding immediately after the incurring of such
Parity Obligations, and the Additional Payments paid in the prior Fiscal Year as
of the date of incurring of such Parity Obligation. Nothing in the Lease
Agreement precludes the Water District from issuing obligations which are
subordinate to the payment of the Lease Payments. See Appendix C--"DEFINITIONS
AND SUMMARY OF CERTAIN PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS--LEASE
AGREEMENT--AGREEMENT OF LEASE; TERM OF LEASE; LEASE PAYMENTS--Limits on
Additional Debt" and "--LEASE AGREEMENT--AGREEMENT OF LEASE; TERM OF LEASE;
LEASE PAYMENTS--No Priority for Additional Obligations."
"Maximum Annual Debt Service" is defined in the Trust Agreement to mean,
as of the date of any calculation, the maximum amount of principal, interest and
mandatory sinking fund deposits required to be paid with respect to the Bonds in
the current or any future Bond Year.
RATE COVENANT; IMPACT OF PROPOSITION 218
To the maximum extent permitted by law, the Water District has covenanted
in the Lease Agreement to fix, prescribe and collect rates and charges for water
service which will be at least sufficient to yield Revenues during each Fiscal
Year equal to one hundred percent of Maintenance and Operation Costs paid in the
immediately preceding Fiscal Year, provided that such costs will include the
Lease Payments payable in such Fiscal Year, plus Additional Payments payable in
such Fiscal Year, plus the amount by which the amount on deposit in the Lease
Revenue Bonds Rate Stabilization Reserve on the last day of the immediately
preceding Fiscal Year was less than twenty-five percent of Maximum Annual Debt
Service as of such day. The Water District may make adjustments from time to
time in such rates and charges and may make such classification thereof as it
deems necessary, but will not reduce the rates and charges then in effect unless
the Revenues from such reduced rates and charges will at all times be sufficient
to meet the requirements of the rate covenant. For information on the possible
limitation on the Water District's ability to comply with the rate covenant as a
consequence of Proposition 218, see "THE WATER DISTRICT--Proposition 218."
LEASE REVENUE BONDS RATE STABILIZATION RESERVE; IMPACT OF PROPOSITION 218
The Lease Agreement provides that the Water District is required to
establish, hold and fund, so long as any Bonds remain outstanding, a Lease
Revenue Bonds Rate Stabilization Reserve in an amount equal to 25% of Maximum
Annual Debt Service (the "Rate Stabilization Requirement"), and that Water
District will withdraw all or any portion of the amounts on deposit in the Lease
Revenue Bonds Rate
19
Stabilization Reserve and transfer such amounts to the Revenue Fund to the
extent amounts in the Revenue Fund are not sufficient to pay Maintenance and
Operation Costs. The Water District may also withdraw all or any portion of the
amounts on deposit in the Lease Revenue Bonds Rate Stabilization Reserve and
transfer such amounts to the Revenue Fund to the extent the Water District needs
to increase Revenues to meet its rate covenant described under the heading
entitled "--Rate Covenant; Impact of Proposition 218" immediately above. Under
the Lease Agreement, amounts so withdrawn are treated as Revenues. The Water
District may expend amounts in the Lease Revenue Bonds Rate Stabilization
Reserve for any purpose permitted by law. The Rate Stabilization Requirement is
in addition to amounts required to be maintained in the rate stabilization
reserve established in connection with the 2002 Certificates of Participation.
For information on the possible limitation on the Water District's ability to
establish rates and charges at levels which would permit deposits to a rate
stabilization fund as a consequence of Proposition 218, see "THE WATER
DISTRICT--Proposition 218."
DEBT SERVICE RESERVE ACCOUNT
A portion of the proceeds of the Bonds will be deposited in the Reserve
Account in an amount equal to the Reserve Requirement. See "DESCRIPTION OF
BONDS--Sources and Uses of Funds." The Reserve Requirement is defined in the
Trust Agreement to be, as of any date of calculation, an amount equal to the
lesser of (i) Maximum Annual Debt Service; (ii) 10% of the proceeds of the
Bonds; or (iii) 125% of Average Annual Debt Service. The Trust Agreement
provides that the Reserve Requirement may be recalculated at any time upon the
request of the Water District, and that the Trustee will maintain the Reserve
Account thereafter at a level equal to the recalculated Reserve Requirement.
The Authority reserves the right to substitute, at any time and from time
to time, one or more letters of credit, Alternative Reserve Account Security,
bond insurance policies or other form of guaranty, in any case approved in
writing by the Bond Insurer from a financial institution the long-term unsecured
obligations of which are rated to the Bond Insurer's satisfaction in
substitution for or in place of all or any portion of the Reserve Requirement,
under the terms of which the Trustee is unconditionally entitled to draw amounts
when required for the purposes thereof. See Appendix C--"DEFINITIONS AND SUMMARY
OF CERTAIN PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS--TRUST AGREEMENT--
ESTABLISHMENT AND ADMINISTRATION OF FUNDS AND ACCOUNTS--Reserve Account."
FINANCIAL GUARANTY INSURANCE POLICY
Payment of the principal of and interest on the Bonds when due will be
insured by a financial guaranty insurance policy to be issued simultaneously
with the delivery of the Bonds by the Bond Insurer. The following information
has been furnished by the Bond Insurer for use in this Official Statement. Such
information has not been independently confirmed or verified by the Authority or
the Water District. No representation is made herein as to the accuracy or
adequacy of such information or as to the absence of material adverse changes in
such information subsequent to the date hereof. Reference is made to Appendix H
for a specimen of the financial guaranty insurance policy.
Payment Pursuant to Financial Guaranty Insurance Policy. Ambac Assurance
Corporation (the "Bond Insurer") has made a commitment to issue a financial
guaranty insurance policy (the "Policy") relating to the Bonds effective as of
the date of issuance of the Bonds. Under the terms of the Policy, the Bond
Insurer will pay to The Bank of New York, in New York, New York or any successor
thereto (the "Insurance Trustee") that portion of the principal of and interest
on the Bonds which shall become Due for Payment but shall be unpaid by reason of
Nonpayment by the Authority (as such terms are defined in the Policy). The Bond
Insurer will make such payments to the Insurance Trustee on the later of the
date on which such principal and interest becomes Due for Payment or within one
business day following the
20
date on which the Bond Insurer shall have received notice of Nonpayment from the
Trustee. The insurance will extend for the term of the Bonds and, once issued,
cannot be canceled by the Bond Insurer.
The Policy will insure payment only on stated maturity dates and on
mandatory sinking fund installment dates, in the case of principal, and on
stated dates for payment, in the case of interest. If the Bonds become subject
to mandatory redemption and insufficient funds are available for redemption of
all outstanding Bonds, the Bond Insurer will remain obligated to pay principal
of and interest on outstanding Bonds on the originally scheduled interest and
principal payment dates including mandatory sinking fund redemption dates. In
the event of any acceleration of the principal of the Bonds, the insured
payments will be made at such times and in such amounts as would have been made
had there not been an acceleration.
In the event the Trustee has notice that any payment of principal of or
interest on a Bond which has become Due for Payment and which is made to a
Bondowner by or on behalf of the Authority has been deemed a preferential
transfer and theretofore recovered from its registered owner pursuant to the
United States Bankruptcy Code in accordance with a final, nonappealable order of
a court of competent jurisdiction, such registered owner will be entitled to
payment from the Bond Insurer to the extent of such recovery if sufficient funds
are not otherwise available.
The Policy does not insure any risk other than Nonpayment, as defined in
the Policy. Specifically, the Policy does not cover:
1. payment on acceleration, as a result of a call for redemption (other
than mandatory sinking fund redemption) or as a result of any other
advancement of maturity.
2. payment of any redemption, prepayment or acceleration premium.
3. nonpayment of principal or interest caused by the insolvency or
negligence of any Trustee, Paying Agent or Bond Registrar, if any.
If it becomes necessary to call upon the Policy, payment of principal
requires surrender of Bonds to the Insurance Trustee together with an
appropriate instrument of assignment so as to permit ownership of such Bonds to
be registered in the name of the Bond Insurer to the extent of the payment under
the Policy. Payment of interest pursuant to the Policy requires proof of
Bondowner entitlement to interest payments and an appropriate assignment of the
Bondowner's right to payment to the Bond Insurer.
Upon payment of the insurance benefits, the Bond Insurer will become the
owner of the Bond, appurtenant coupon, if any, or right to payment of principal
or interest on such Bond and will be fully subrogated to the surrendering
Bondowner's rights to payment.
In the event that the Bond Insurer were to become insolvent, any claims
arising under the Policy would be excluded from coverage by the California
Insurance Guaranty Association, established pursuant to the laws of the State of
California.
Ambac Assurance Corporation. The Bond Insurer is a Wisconsin-domiciled
stock insurance corporation regulated by the Office of the Commissioner of
Insurance of the State of Wisconsin and licensed to do business in 50 states,
the District of Columbia, the Territory of Guam and the Commonwealth of Puerto
Rico, with admitted assets of approximately $5,802,000,000 (unaudited) and
statutory capital of approximately $3,564,000,000 (unaudited) as of September
30, 2002. Statutory capital consists of the Bond Insurer's policyholders'
surplus and statutory contingency reserve. Standard & Poor's Credit Markets
Services, a Division of The McGraw-Hill Companies, Moody's Investors Service and
Fitch, Inc. have each assigned a triple-A financial strength rating to the Bond
Insurer.
21
The Bond Insurer has obtained a ruling from the Internal Revenue Service
to the effect that the insuring of an obligation by the Bond Insurer will not
affect the treatment for federal income tax purposes of interest on such
obligation and that insurance proceeds representing maturing interest paid by
the Bond Insurer under policy provisions substantially identical to those
contained in its financial guaranty insurance policy shall be treated for
federal income tax purposes in the same manner as if such payments were made by
the Authority.
The Bond Insurer makes no representation regarding the Bonds or the
advisability of investing in the Bonds and makes no representation regarding,
nor has it participated in the preparation of, the Official Statement other than
the information supplied by the Bond Insurer and presented under the heading
"SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Financial Guaranty Insurance
Policy" and in Appendix H--"SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY."
Available Information. The parent company of the Bond Insurer, Ambac
Financial Group, Inc. (the "Parent Company"), is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). These
reports, proxy statements and other information can be read and copied at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The SEC maintains an internet site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding companies that file electronically with the SEC, including the Parent
Company. These reports, proxy statements and other information can also be read
at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad
Street, New York, New York 10005.
Copies of the Bond Insurer's financial statements prepared in accordance
with statutory accounting standards are available from the Bond Insurer. The
address of the Bond Insurer's administrative offices and its telephone number
are One State Street Plaza, 19th Floor, New York, New York 10004 and (212)
668-0340.
Incorporation of Certain Documents by Reference. The following documents
filed by the Parent Company with the SEC (File No. 1-10777) are incorporated by
reference in this Official Statement:
1) The Parent Company's Current Report on Form 8-K dated January 23,
2002 and filed on January 25, 2002;
2) The Parent Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 and filed on March 26, 2002;
3) The Parent Company's Current Report on Form 8-K dated April 17, 2002
and filed on April 18, 2002;
4) The Parent Company's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended March 31, 2002 and filed on May 13, 2002;
5) The Parent Company's Current Report on Form 8-K dated July 17, 2002
and filed on July 19, 2002;
6) The Parent Company's Current Report on Form 8-K dated August 14,
2002 and filed on August 14, 2002;
22
7) The Parent Company's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended June 30,2002 and filed on August 14,2002;
8) The Parent Company's Current Report on Form 8-K dated October 16,
2002 and filed on October 17,2002;
9) The Parent Company's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended September 30,2002 and filed on November 14,
2002; and
10) The Parent Company's Current Report on Form 8-K dated November 18,
2002 and filed on November 20,2002.
All documents subsequently filed by the Parent Company pursuant to the
requirements of the Exchange Act after the date of this Official Statement will
be available for inspection in the same manner as described in "--Available
Information" above.
INSURANCE AND INDEMNITY AGREEMENT AND INSURANCE AGREEMENT GUARANTY
The Bond Insurer, the Water District and the Company will enter into an
Insurance and Indemnity Agreement, to be dated as of the date of delivery of the
Bonds (the "Insurance Agreement"), initially among the Bond Insurer, the Water
District and the Company (and after the assignment of the Service Contract by
the Company to the SPE, among the Bond Insurer, the Water District and the SPE),
pursuant to which the Water District and the DB/Operator (subject to the
applicable Liability Caps described below) will have separate obligations to
reimburse the Bond Insurer for certain payments of principal and interest on the
outstanding Bonds made by the Bond Insurer under the Policy and certain expenses
that the Bond Insurer incurs.
DB/Operator Payment and Reimbursement Obligations. In the Insurance
Agreement, the DB/Operator (subject to the Liability Caps described below) will
agree to reimburse the Bond Insurer for certain expenses in connection with (i)
the enforcement, defense or preservation of any of the rights of the Bond
Insurer, the Bondowners or the Trustee under certain agreements, (ii) the cure
of an event of default caused by DB/Operator under the Service Contract and
(iii) any amendment, waiver or other action requested by the DB/Operator with
respect to, or related to, certain agreements.
The Insurance Agreement will provide that, if the Service Contract is
terminated as a result of a Termination Event, the DB/Operator (subject to the
Liability Caps set forth below) will reimburse the Bond Insurer for certain
payments of principal or interest on the outstanding Bonds made by the Bond
Insurer under the Policy to the extent that Lease Payments are not available to
fund such payments as a result of a Termination Event.
Water District Payment and Reimbursement Obligations. In the Insurance
Agreement, the Water District will agree to reimburse the Bond Insurer for
certain expenses in connection with (i) the enforcement, defense or preservation
of any rights under certain agreements, or (ii) any amendment, waiver or other
action requested by the Water District with respect to, or related to, certain
agreements.
Unless a Termination Event will have occurred, the Insurance Agreement
will require the Water District to reimburse the Bond Insurer for any payment of
principal or interest on the outstanding Bonds made by the Bond Insurer under
the Policy which relates to a payment obligation on the Bonds occurring prior to
a Termination Event. Upon and after a Termination Event, the Water District will
have no further obligation to make, and no liability to reimburse the Bond
Insurer for the amount of, any Lease Payments (except those that were accrued
prior to such Termination Event), and the Bond Insurer will have no recourse to
the Water District therefor. After a merger of the Water District into the City,
the City's
23
financial obligations under the Insurance Agreement (as successor to the Water
District) will be limited to the amounts from time to time on deposit in the
Revenue Fund which will become the City's "Water Enterprise Fund," and the Bond
Insurer will have no recourse to the City (as successor to the Water District)
for amounts in excess thereof.
Assignment of Company Rights and Obligations. In the Insurance Agreement,
the Company will agree for the benefit of the Bond Insurer that within six
months after the date the Bonds are issued, the Company will assign all of its
rights in and to, and delegate all of its obligations under, the Service
Contract and the Insurance Agreement to the SPE, a wholly owned subsidiary of
the Company that satisfies certain corporate separation requirements set forth
in the Insurance Agreement, and will cause the SPE to assume all of the
obligations of the Company under the Service Contract and the Insurance
Agreement; provided that the Insurance Agreement Guaranty and the Service
Contract Guaranty Agreement will extend to such obligations of the SPE following
such assignment. Upon the effectiveness of such assignment, the Company will be
released from all of its obligations under the Service Contract and the
Insurance Agreement. In the Insurance Agreement, if such assignment has not
occurred (and certain related requirements have not been met) within six months
after the date the Bonds are issued, then the Company will pay to the Water
District certain liquidated damages for each month after the six-month
anniversary of the date the Bonds are issued that such assignment has not
occurred.
In the Insurance Agreement, the Bond Insurer will be granted (subject to
the terms and conditions of the Service Contract) the right: (i) to cure certain
events of default caused by the DB/Operator under the Service Contract (as
further described in "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Water
District Right to Terminate Lease--Bond Insurer Notice and Cure Provisions") and
(ii) to assign the DB/Operator's rights and obligations under the Service
Contract to a replacement operator (as further described in "SOURCES OF PAYMENT
AND SECURITY FOR THE BONDS--Water District Right to Terminate Lease--Bond
Insurer Notice and Cure Provisions--Assignment"). The Water District will agree
in the Insurance Agreement to fully cooperate with the Bond Insurer in all
reasonable respects to assist the Bond Insurer in identifying and engaging a
replacement operator under the Service Contract.
Insurance Agreement Guaranty. As security for the performance of
DB/Operator's obligations under the Insurance Agreement, the Company will cause
the Guarantor to enter into a Guaranty Agreement, to be dated as of the date of
delivery of the Bonds (the "Insurance Agreement Guaranty"), between the
Guarantor and the Bond Insurer. Pursuant to the Insurance Agreement Guaranty,
the Guarantor, subject to the applicable Liability Caps described below, will
during the term of the Insurance Agreement Guaranty guarantee to the Bond
Insurer (i) the payment when due of the payments required to be made by the
DB/Operator under the Insurance Agreement to, or for the account of, the Bond
Insurer, and (ii) the performance of the DB/Operator pursuant to the terms of
the Insurance Agreement (the "DB/Operator Obligations"). The Insurance Agreement
Guaranty will terminate upon the earlier to occur of the following: (a) all of
the DB/Operator Obligations have been fully paid and performed; or (b) the
voluntary or involuntary insolvency, bankruptcy or reorganization of the
Guarantor, or other similar proceedings against the Guarantor.
Other Covenants and Security for the Bond Insurer. As further security for
the performance of DB/Operator's obligations under the Insurance Agreement, the
Company will grant to the Bond Insurer a security interest in the interest of
the DB/Operator in the Service Contract and certain contracts entered into in
connection therewith.
Pursuant to the Lease Agreement and the Insurance Agreement, the Authority
and the City will agree that upon the occurrence of a termination of the Lease
Agreement as a result of a Termination Event, the Water District will not have
the right to construct, operate or otherwise use (except for maintenance by the
Water District, the Authority or the City) the Project for the Lock-out Period,
except
24
with the prior written approval of the Bond Insurer. In addition, the Water
District will agree that, to the extent permitted by law, it will not develop or
construct Alternative Facilities during any cure period following an event of
default under the Service Contract or during any Lock-out Period, if applicable,
without the prior written consent of the Bond Insurer. See "SOURCES OF PAYMENT
AND SECURITY FOR THE BONDS--Water District Right to Terminate Lease."
The Insurance Agreement will provide that, in connection with certain
events of default under the Service Contract, the Bond Insurer rather than the
DB/Operator will have control during certain cure periods, as follows. Prior to
Acceptance under the Service Contract, if an event of default occurs under the
Service Contract due to a failure to achieve Provisional Acceptance by the
Scheduled Acceptance Date, then the DB/Operator will have the first 274 days of
the 547-day Extension Period allowed for the remedy thereof and the Bond
Insurer, with the cooperation of the District, will have the remaining 273 days
for the remedy thereof (unless during the first 274 days of such 547-day
Extension Period there shall also have occurred a voluntary or involuntary
bankruptcy of the Guarantor, the Company or the SPE, in which case the
DB/Operator shall instead have only the first 122 days of such 547-day Extension
Period, or such greater number of days out of the first 274 days as shall have
already passed at the time the bankruptcy occurs, and the Bond Insurer, with the
cooperation of the District, shall have the remaining days).
In addition, after the Acceptance under the Service Contract, if an event
of default under the Service Contract occurs and is continuing for which there
is a cure period and at the same time a voluntary or involuntary bankruptcy of
the Guarantor, the Company or the SPE has occurred and is continuing, the Bond
Insurer will grant the DB/Operator 30 days to make a proposal to remedy such
default, which the Bond Insurer may accept or reject in its discretion, but the
Bond Insurer shall nevertheless have the ability to pursue all of its cure
rights under the Service Contract during the applicable cure period. Absent the
occurrence and continuation of a voluntary or involuntary bankruptcy of the
Guarantor, the Company or the SPE, the cure rights shall be as otherwise
provided in the Service Contract. For information regarding the Scheduled
Acceptance Date, Provisional Acceptance and the Extension Period, see Appendix D
"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT."
In addition, the Insurance Agreement will provide that prior to the time
the SPE becomes the DB/Operator, all cure periods under the Service Contract
will be tolled in the event of a voluntary or involuntary insolvency, bankruptcy
or reorganization of the Company or any of its affiliates (or other similar
proceedings against the Company or any of its affiliates) pursuant to which
there is a stay affecting the rights of the Water District, the Trustee or the
Bond Insurer under any of the Insurance Agreement, the Insurance Agreement
Guaranty, the Service Contract Letter of Credit, the construction performance
bond required under the Service Contract, the Policy, the Property Lease, the
Lease Agreement, the Service Contract, the Bonds, the Trust Agreement or the
Service Contract Guaranty Agreement, until such time as one of the following has
occurred: (a) the stay has been lifted; or (b) the SPE has become the
DB/Operator.
Liability Caps. The Insurance Agreement and the Insurance Agreement
Guaranty will provide that the maximum aggregate personal liability of the
DB/Operator, the Guarantor, and their respective affiliates, collectively, to
the Bond Insurer relating to any event occurring prior to the Acceptance Date
(as defined in the Service Contract) under the Insurance Agreement, the
Insurance Agreement Guaranty, certain other agreements or otherwise in
connection with the foregoing or the Project (the "Construction Period Liability
Cap"), will not exceed an amount equal to: (i) $6,000,000, less (ii) the amount
then available to be drawn under the Service Contract Letter of Credit (see
"SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Service Contract Letter of
Credit"), and less (iii) all amounts drawn under the Service Contract Letter of
Credit.
25
The Insurance Agreement and the Insurance Agreement Guaranty will further
provide that the maximum aggregate personal liability of the DB/Operator, the
Guarantor and their respective affiliates, collectively, to the Bond Insurer
relating to any event occurring on or after the Acceptance Date (as defined in
the Service Contract) under the Insurance Agreement, the Insurance Agreement
Guaranty, certain other agreements or otherwise in connection with the foregoing
or the Project (the "Operation Period Liability Cap" and together with the
Construction Period Liability Cap, each a "Liability Cap"), will not exceed an
amount equal to: (i) $4,000,000, plus (ii) an amount equal to the reasonable
actual costs incurred by, or on behalf of, the Bond Insurer following an event
of default by the DB/Operator under the Service Contract to replace the portion
of the Service Contract Project Improvements comprising the reverse osmosis unit
(as more specifically defined in the Insurance Agreement).
Trustee and Bondowners Not Entitled to Benefit. The DB/Operator's
obligations under the Insurance Agreement will be solely for the benefit of the
Bond Insurer (and, to a limited extent, the Water District), and the Water
District's obligations under the Insurance Agreement will be solely for the
benefit of the Bond Insurer. Similarly, the Guarantor's obligations under the
Insurance Agreement Guaranty will be solely for the benefit of the Bond Insurer.
Neither the Trustee nor the Bondowners will have any interest in or rights under
or rights to enforce the Insurance Agreement or the Insurance Agreement
Guaranty.
THE PROJECT
OVERVIEW
The Project consists of the design, development, acquisition and
construction of the Groundwater Recovery Plant and related offsite improvements
and facilities. The Groundwater Recovery Plant is expected to consist primarily
of two reverse osmosis treatment trains within an enclosed building; three
iron/manganese filters, two desanders, and two cartridge filters; bulk chemical
storage tanks within a semi-enclosed building; an approximately 85,000-gallon
bolted steel tank for iron/manganese filter backwash water supply; two
degasifiers; an approximately 30,000-gallon clearwell tank, a finished water
pumping station and an approximately 225,000-gallon bolted steel tank for spent
backwash water recovery. For a site plan diagram, see Section III of the
Independent Engineer's Report entitled "PROJECT SITE" attached hereto as
Appendix G. The related offsite improvements and facilities are anticipated to
include eight, or possibly nine, well sites, a pipeline to collect well water
and convey it to the Groundwater Recovery Plant, a booster pumping station and a
pipeline to convey the treated water from the Groundwater Recovery Plant to the
Water System, and a pipeline to convey the reverse osmosis concentrate discharge
from the Groundwater Recovery Plant to an ocean outfall. For well collection
system schematics and a treated water and disposal pipeline schematic, see
Section III of the Independent Engineer's Report entitled "PROJECT SITE"
attached hereto as Appendix G. The Groundwater Recovery Plant will be located on
property adjacent to Descanso Veterans Park on Paseo Adelanto in San Juan
Capistrano, California. In addition, the eight, or possible nine, well sites,
the pipeline and the booster pumping station will be constructed at various
locations within the boundaries of the City.
The purpose of the Project is to extract brackish groundwater, which in
its natural state is unsuitable to use as drinking water due to high
concentrations of solids and other impurities, from multiple well sites, to
treat that groundwater, to blend the finished water to be compatible with the
other water sources available to the Water District and to pump the finished
water into the Water System. The treatment of the brackish groundwater will
consist of three processes: (i) pretreatment to remove sand, iron, and manganese
from the well water flowing into the Groundwater Recovery Plant; (ii) desalting
the pretreated water using reverse osmosis to reduce total dissolved solids; and
(iii) post-treatment to meet drinking water quality regulations including
control of the product water corrosiveness. Reverse osmosis is a high-pressure
process, developed over thirty years ago, that forces water through a thin
membrane to filter out minerals and contaminates, including salts and other
materials. For a process flow diagram, see
26
Section II of the Independent Engineer's Report entitled "PROCESS TECHNOLOGY"
attached hereto as Appendix G.
In an effort to increase system reliability to its customers, the Water
District has identified two goals: (i) securing fifty-percent of its annual
water supply from local groundwater sources; and (ii) maintaining emergency
storage sufficient to supply five average days of water demand in the event of
an emergency. With respect to the Water District's source of annual water
supply, the Water District currently imports approximately 85% to 90% of its
water from MWD. See "THE WATER DISTRICT--Sources of Water Supply." Although the
delivery of water to Southern California has been reliable in the past,
approximately sixteen million Southern Californians rely on MWD for water, and
MWD faces the potential for decreased deliveries from both its imported water
sources, the Colorado River and the State Water Project. Furthermore, to meet
the Water District's ultimate demand in absence of the Project, the Water
District has projected that it would need to acquire additional water import
capacity rights and construct or expand pipelines to manage such additional
import water capacity. With respect to emergency storage, it is estimated that
the Water District will be able to provide over 60% of average daily water
demand between the Water District's existing wells and the Project compared to
its current ability to only provide approximately 11% of average daily water
demand from the Water District's existing wells.
Once constructed and fully operational, it is anticipated that the Project
will supply approximately one-half of the Water District's annual water supply
requirements and, therefore, assist the Water District in meeting its goal of
securing fifty-percent of its annual water supply from local groundwater
sources. In addition, based on current projections, the development of local
groundwater sources in connection with the operation of the Groundwater Recovery
Plant is anticipated to significantly reduce or eliminate the need for the Water
District to acquire additional import capacity and the related costs of
infrastructure improvements necessary to manage such additional import water
capacity as well as to significantly reduce the need for additional emergency
storage. The Water District also anticipates, based upon current information,
that the costs associated with the financing of the Project and the operations
of such improvements will be offset by certain grant credits or payments from
MWD and increased water rates. See "--Agreement with Metropolitan Water District
of Southern California" below. For a comparison of alternate wholesale water
rates, see Section 8.3 of the Independent Engineer's Report entitled "--Project
Cost Projections" attached hereto as Appendix G. See also the information
included in Table No. 9 below and under the caption "THE WATER DISTRICT--Rates
and Charges; Collection" for projected costs of the Service Contract Project
Improvements and projected increases in water rates. Other benefits the
development of the Project are projected to provide the Water District include a
reduction of the Water District's dependence on imported water in the event of
the reduction of imported water during a drought, enhanced system reliability in
the event of a loss of imported water due to transmission main outages, and
reduced exposure to MWD's rising cost of water. Accordingly, the Water District
has determined that the Water District's objectives justify the Project even
though the costs associated with the financing of the Project and the operations
of such improvements may not be fully offset solely by the credits or payments
from MWD.
As with any major construction effort, construction of the Service
Contract Project Improvements will involve many risks, including shortages of
materials and labor, work stoppages, labor relations disputes, weather
interference, engineering, environmental, permitting or geological problems and
unanticipated cost increases for reasons beyond the control of the contractors,
the occurrence of which could give rise to delays, cost overruns or performance
deficiencies, or otherwise adversely affect the design, construction or
operation of the Service Contract Project Improvements. See Appendix G--
"INDEPENDENT ENGINEER'S REPORT" for the Independent Engineer's Report evaluating
the Project and the capability of the Project participants to successfully
complete the design, construction and operation of the Project. For information
regarding the right of the Water District to terminate the Lease Agreement in
the event it exercises its right to terminate the Service Contract in the event
the
27
DB/Operator defaults under the Service Contract, see "SOURCES OF PAYMENT AND
SECURITY FOR THE BONDS--Water District Right to Terminate Lease."
AGREEMENT WITH METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA
In connection with the development of the Groundwater Recovery Plant, the
Water District has been assigned the rights to receive certain credits or
payments from MWD pursuant to the 1998 San Juan Basin Desalter Project Agreement
between MWD, the Municipal Water District of Orange County ("MWDOC") and the
Authority, effective as of December 4, 1998, as amended and supplemented by that
certain First Amendment thereto, dated as of October 15, 2002, by and among MWD,
MWDOC, the Authority and the Water District (collectively, the "Metropolitan
Agreement"). The Metropolitan Agreement provides that MWD will make a financial
contribution to the Project in a dollar amount per acre-foot of recovered
groundwater produced based on an established water right equal to the sum of the
project unit cost and deferred cost as set forth in the Metropolitan Agreement
minus MWD's prevailing full service treated water rate; provided, that the
financial contribution is capped at $250 per acre-foot and is limited to up to
5,760 acre-feet in any one fiscal year. MWD's water supply and demand
projections indicate that supplemental sources of water must be developed to
meet future requirements, and MWD has determined to take necessary steps to
provide economical, high quality water supplies in the years ahead. Accordingly,
MWD, in accordance with its Groundwater Recovery Program, has decided to assist
with the cost of treating the degraded groundwater in the area of the Project.
It is anticipated that the Project will increase domestic and municipal
production by producing approximately 4,800 acre-feet of finished water per
year. See "THE PROJECT--Overview." This production rate is based upon eighty
percent of the maximum capacity of the Groundwater Recovery Plant. Since the
projected cost to produce each acre-foot of recovered groundwater at the
Groundwater Recovery Plant is expected to exceed the projected cost of MWD's
prevailing full service treated water rate, it is expected that the Water
District will receive the full $250 MWD contribution per acre-foot of
groundwater produced at the Groundwater Recovery Plant under the Metropolitan
Agreement. See "--Independent Engineer's Report" below and Section X of the
Independent Engineer's Report entitled "CONCLUSIONS," attached hereto as
Appendix G, for the Independent Engineer's conclusions with respect to the MWD
contribution.
The Metropolitan Agreement provides that the financial contribution will
continue for twenty years from the date of the initial production of recovered
groundwater. However, the Metropolitan Agreement will automatically terminate if
(i) payments are not required to be made by MWD for a five consecutive-year
period subsequent to the initiation of operations at the Groundwater Recovery
Plant, (ii) construction of the Groundwater Recovery Plant has not commenced by
December 4, 2002, (iii) no recovered groundwater is produced by December 4,
2004, or (iv) in the event of a material breach by any party to the Metropolitan
Agreement other than MWD. Accordingly, if the Groundwater Recovery Plant does
not produce finished water for a five consecutive-year period subsequent to the
initiation of operations and, as a result, MWD is not obligated to make any
contributions under the Metropolitan Agreement for such period, the Metropolitan
Agreement will terminate. Construction of the Groundwater Recovery Plant
commenced on November 25, 2002. For information regarding the obligation of the
DB/Operator to pay liquidated damages in connection with certain terminations of
the Metropolitan Agreement or certain losses of credits or payments from MWD
under the Metropolitan Agreement, see "--Liquidated Damages under the Service
Contract--Liquidated Damages with respect to the Metropolitan Agreement" below.
For the Independent Engineer's conclusions regarding the reasonableness of the
construction schedule to complete the Project within the parameters of the
Metropolitan Agreement, see "--Independent Engineer's Report" below and Section
IV of the Independent Engineer's Report entitled "ENGINEERING, PROCUREMENT AND
CONSTRUCTION" attached hereto as Appendix G.
28
PROJECT WATER RIGHTS AND IMPLEMENTATION AGREEMENT
Under the Service Contract, the DB/Operator is required to design,
engineer, construct, operate and maintain the Service Contract Project
Improvements to be capable of processing 5.14 million gallons of groundwater per
day and the Water District has the right to demand the production and delivery
of up to 5,231 acre-feet of treated water on an annual basis, subject to the
Water District supplying sufficient groundwater to enable the DB/Operator to
produce such amount of treated water within the parameters of the DB/Operator's
performance guarantees under the Service Contract. Pursuant to the
Implementation Agreement, the Authority has allocated 5,800 acre-feet per year
of the Authority's existing rights to groundwater from the San Juan Creek, which
is located within the San Juan Basin, to the Project. (For a discussion of the
San Juan Basin, see Section 3.3.3 of the Independent Engineer's Report entitled
"--Groundwater Basins" attached hereto as Appendix G.) It is expected that the
Water District will demand approximately 4,800 acre-feet of treated water be
produced on an annual basis pursuant to the Service Contract and the allocation
of 5,800 acre-feet of groundwater per year under the Implementation Agreement is
expected to be sufficient to enable the DB/Operator to produce the 4,800
acre-feet of treated water on an annual basis. However, the allocation of 5,800
acre-feet of groundwater under the Implementation Agreement probably will not be
sufficient to produce the full 5,231 acre-feet of treated water provided for
under the Service Contact. Accordingly, to the extent the Water District demands
additional treated water, it may be necessary for the Water District to allocate
a portion of its existing groundwater rights to the Project. See "THE WATER
DISTRICT--Sources of Water Supply." Similarly, to the extent the DB/Operator
desires to provide surplus water in order to mitigate any treated water delivery
shortfalls (see Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE
CONTRACT--Performance--Water Delivery Guarantee") and the 5,800 acre-feet of
groundwater per year allocated under the Implementation Agreement is
insufficient, it would also be necessary for the Water District to so allocate
such other water rights to the Project.
LIQUIDATED DAMAGES UNDER THE SERVICE CONTRACT
Under certain circumstances the DB/Operator is obligated to pay certain
non-performance liquidated damages to the Water District pursuant to the Service
Contract. Certain of these non-performance liquidated damages are described
below.
Liquidated Damages Relating to the Metropolitan Agreement. Under the
Metropolitan Agreement, MWD has agreed to make a financial contribution to the
Project, subject to certain terms and conditions. See "--Agreement with
Metropolitan Water District of Southern California" above. Under certain
circumstances the DB/Operator is obligated to pay liquidated damages to the
Water District with respect to the Metropolitan Agreement pursuant to the
Service Contract. The Service Contract provides that in the event (i) the
Metropolitan Agreement terminates because no recovered groundwater is produced
at the Groundwater Recovery Plant by December 4, 2004, or the financial
contribution payments are not required to be made by MWD under the Metropolitan
Agreement for a five consecutive-year period subsequent to the initiation of
operations at the Groundwater Recovery Plant, and (ii) such termination is the
result of a failure to commence construction on or before December 4,2002, or a
failure to produce recovered groundwater that, in either case, is not caused by
the occurrence of an Uncontrollable Circumstance, Water District requested
changes or District Fault under the Service Contract, the DB/Operator is
required to pay the Water District for each Fiscal Year during the term of the
Service Contract, as liquidated damages for such failure, an amount, calculated
in accordance with the Service Contract, intended to equal the lost credits or
payments from MWD under the Metropolitan Agreement. For information regarding
the credits or payments from MWD under the Metropolitan Agreement, see
"--Agreement with Metropolitan Water District of Southern California" above. See
Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Provisional
Acceptance, Acceptance and Final Completion of the Project--Effect of Unexcused
Delay -Metropolitan Agreement."
29
Furthermore, except with respect to certain delays in achieving Acceptance
of the Service Contract Project Improvements under the Service Contract, the
DB/Operator has agreed under the Service Contract to perform all of the Water
District's obligations under the Metropolitan Agreement. In the event the
Metropolitan Agreement is terminated due to a failure of the DB/Operator to
comply with such obligations, and such failure is not caused by an
Uncontrollable Circumstance, Water District-directed Change Order or District
Fault, the DB/Operator has agreed in the Service Contract to pay the Water
District liquidated damages in the amounts described above for each remaining
Contract Year or portion thereof during the term of the Service Contract. See
Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Operation
and Management--Compliance with Metropolitan Agreement."
Daily Delay Liquidated Damages. In addition, the Service Contract provides
that, in the event that Provisional Acceptance of the Service Contract Project
Improvements under the Service Contract (or, if Provisional Acceptance is not
certified by the DB/Operator, Acceptance) occurs subsequent to December 4, 2004,
or a later date if the DB/Operator's design and construction work is delayed as
a result of an Uncontrollable Circumstance, Water District requested changes or
District Fault, the DB/Operator will pay to the Water District daily delay
liquidated damages for each day that the Provisional Acceptance Date (or, if
Provisional Acceptance is not certified by the DB/Operator, the Acceptance Date)
falls after December 4, 2004, in an amount equal to the Lease Payments
(including payments with respect to both interest and principal) accrued by the
Water District on a daily basis, up to the end of the Extension Period and
thereafter until any termination of the Service Contract for an event of default
by the DB/Operator under the Service Contract. See Appendix D--"SUMMARY OF
CERTAIN PROVISIONS OF THE SERVICE CONTRACT--Provisional Acceptance, Acceptance
and Final Completion of the Project--Daily Liquidated Damages." The Service
Contract provides that such damages will be payable on the first day of each
month and, upon any such termination, on the date of termination, and will be
secured by the Service Contract Letter of Credit. THE SERVICE CONTRACT LETTER OF
CREDIT WILL BE ISSUED TO THE WATER DISTRICT. HOWEVER, UNDER THE TRUST AGREEMENT,
THE WATER DISTRICT WILL COVENANT TO TRANSFER TO THE TRUSTEE, FOR DEPOSIT INTO
THE DEBT SERVICE PAYMENT ACCOUNT ESTABLISHED UNDER THE TRUST AGREEMENT, NO LATER
THAN THREE BUSINESS DAYS FOLLOWING RECEIPT THEREOF BY THE WATER DISTRICT, ALL
PROCEEDS OF ANY DRAWING ON THE SERVICE CONTRACT LETTER OF CREDIT RECEIVED BY THE
WATER DISTRICT. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Service
Contract Letter of Credit."
Delivery Shortfall Liquidated Damages. Under certain circumstances
described below the DB/Operator is obligated to pay liquidated damages to the
Water District with respect to finished water delivery shortfalls pursuant to
the Service Contract. The Service Contract provides that if, in any Contract
Year, (i) the cumulative amount of any finished water delivery shortfalls under
the Water Delivery Guarantee (defined below) exceeds (ii) the cumulative amount
of any permissible surplus finished water deliveries pursuant to the Service
Contract, the DB/Operator is obligated to pay liquidated damages to the Water
District, for each acre foot of such finished water delivery shortfalls. The
amount of such liquidated damages is equal to the sum of (x) MWD's prevailing
full service treated water rate (expressed in dollars per acre foot) plus, (y)
MWD's financial contribution under the Metropolitan Agreement with respect to
such Contract Year (expressed in dollars per acre foot), plus (z) the
administrative and operation and maintenance charge (expressed in dollars per
acre foot) imposed by MWDOC on the Water District with respect to such Contract
Year (exclusive of any elements thereof which are attributable to services
provided by MWDOC which are substantially different in scope or quantity than
the services historically provided by MWDOC to the Water District prior to the
Contract Date); provided, however, that the amount described in item (y) above
will not be payable if the Metropolitan Agreement has been terminated as the
result of a failure to timely commence construction or a failure to timely
produce recovered groundwater that is caused by the occurrence of an
Uncontrollable Circumstance, Water District requested changes or District Fault
under the Service Contract as described
30
under the heading entitled "--Liquidated Damages Relating to the Metropolitan
Agreement" above and the DB/Operator has paid liquidated damages as a result
thereof.
In order to give the DB/Operator an opportunity to mitigate any daily
delivery shortfalls occurring in a Contract Year, the Service Contract provides
that the DB/Operator may, during the months of April through November, deliver
finished water to the Water District on any day in a volume up to 5% more (or up
to 9% more, subject to Water District approval) than the Firm Daily Water Demand
Volume (defined below) established by the Water District with respect to such
day, but subject to a maximum overall limit of 5,231 acre feet per Contract
Year. Moreover, the DB/Operator has the right under the Service Contract to
apply surplus water deliveries achieved in the first 60 days of any Contract
Year against finished water delivery shortfalls occurring in the last 60 days of
the preceding Contract Year, so as to reduce any liquidated damages that may be
payable as described above. The DB/Operator is not permitted to deliver finished
water in excess of the Firm Daily Water Demand Volume during the months of
December, January, February and March and is not be entitled to any additional
compensation for any such surplus daily deliveries under the Service Contract.
See "--Project Water Rights and Implementation Agreement" for information
regarding the allocation of groundwater rights to the Project.
The term "Water Delivery Guarantee" is defined in the Service Contract to
mean the requirement that, except to the extent excused by Uncontrollable
Circumstances or District Fault and with respect to certain adjustments
permitted under the Service Contract, including adjustments for scheduled and
unscheduled maintenance, repair and replacement, the DB/Operator operate the
Project so as to deliver finished water to the Water District each day during
the operation period in volumes at least equal to the Firm Daily Water Demand
Volume established under the Service Contract with respect to such day.
The term "Firm Daily Water Demand Volume" is defined in the Service
Contract to mean the volume of finished water demanded by the Water District
based on the flow rates specified in the "day-before" firm finished water demand
schedules furnished by the Water District as adjusted by any "day-of"
modifications thereto made by the Water District pursuant to the Service
Contract.
Other Performance Guarantees. The DB/Operator has made certain other
guarantees under the Service Contract with respect to the Project, including
guarantees with respect to the quality of the finished water and the production
efficiency of the Service Contract Project Improvements, and has agreed to
certain non-performance penalties with respect to such other guarantees. See
Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT--
Performance."
THE COMPANY
The Company, ECO Resources, Inc., a Texas corporation, is headquartered in
the Houston suburb of Sugar Land, Texas and is led by president and chief
executive officer, Peter J. Moerbeek. The Company manages, operates and
maintains utility systems offering water production, water distribution, sewage
treatment, wastewater collection, and storm water collection along with other
services. The Company, established in 1973, has provided a full range of
services to the water industry since its inception, and currently provides such
services to more than 200 cities, municipal utility districts and large
companies throughout the southern and western United States. For an evaluation
of the capability of the Company to successfully complete the design,
construction and operation of the Project, see Appendix G--"INDEPENDENT
ENGINEER'S REPORT."
In the Insurance Agreement, the Company will agree for the benefit of the
Bond Insurer that within six months after the date the Bonds are issued, the
Company will assign all of its rights in and to, and delegate all of its
obligations under, the Service Contract and the Insurance Agreement to the SPE,
a wholly owned subsidiary of the Company that satisfies certain corporate
separation requirements set
31
forth in the Insurance Agreement, and will cause the SPE to assume all of the
obligations of the Company under the Service Contract and the Insurance
Agreement; provided that the Insurance Agreement Guaranty and the Service
Contract Guaranty Agreement will extend to such obligations of the SPE following
such assignment. Upon the effectiveness of such assignment, the Company will be
released from all of its obligations under the Service Contract and the
Insurance Agreement. The Company will, simultaneously with the assignment to the
SPE, enter into a management and administrative services agreement with the SPE
for a term equal to the term of the Service Contract, whereby the Company will
provide certain management and administrative services necessary to support the
SPE's performance of its obligations under the Service Contract, including the
construction and operation of the Service Contract Project Improvements. See
"SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Insurance and Indemnity
Agreement and Insurance Agreement Guaranty--Assignment of Company Rights and
Obligations."
The Guarantor, Southwest Water Company, is a Delaware corporation and the
corporate parent of the Company. The Guarantor was founded in West Covina,
California in 1954. The Guarantor's experience in building, owning, and
operating water utility systems is broad and includes five substantial water
utility systems; two in California, one in New Mexico and two in Texas.
Southwest Water Company, through its subsidiaries, the Company and Suburban
Water Systems, has financed, built and operated over $100 million of
water/wastewater systems throughout the southwestern United States. For more
information regarding the Guarantor, see Appendix G--"INDEPENDENT ENGINEER'S
REPORT."
INDEPENDENT ENGINEER'S REPORT
PSOMAS (the "Independent Engineer") has prepared an updated report dated
December 6, 2002, attached hereto as Appendix G (the "Independent Engineer's
Report"). The Independent Engineer's Report should be read in its entirety for
an understanding of the Independent Engineer's conclusions concerning the
Project.
Based upon the analysis and the conclusions presented in the Independent
Engineer's Report, the Independent Engineer is of the following opinions:
1. All of the Project Participants (as defined in the Independent
Engineer's Report) have the relevant experience and financial
capability to successfully complete the design, construction and
operation of the Project within the parameters of the Service
Contract.
2. The brackish water treatment process proposed for the Project will
produce the quality and quantity of water required by the Service
Contract.
3. The site on which the Groundwater Recovery Plant is to be located is
adequate in size and location and from an infrastructure and
geotechnical perspective is adequate for construction and operation
of the Groundwater Recovery Plant. The sites for the wells do not
meet the new requirements that the California Department of Health
Services is enforcing, but these new requirements should not
significantly increase the capital and operating costs of the
Project.
4. There is sufficient unappropriated water within the San Juan Basin
to provide an adequate source of feed water for the Project for the
Operation Period of the Service Contract and beyond for the full
term of the Bonds.
5. The environmental site assessments have been accomplished in a
manner consistent with industry standards, using appropriate
industry protocols. The adopted Mitigated Negative
32
Declaration for the Project does not impose any conditions which are
not common to normal construction activities and should not cause
any significant delay or increased cost to the Project.
6. Based upon the Service Contract parameters, the preliminary design,
and the proposed equipment list, the Project will operate and
provide water which meets federal, state and local drinking water
standards ("Finished Water") within the Service Contract parameters
for the Operation Period of the Service Contract and beyond for the
full term of the Bonds.
7. The construction of the Project is similar to other projects
constructed by ARB, Inc. (the general contractor for the Project)
and the construction of the Project can be accomplished within the
scope of the Service Contract, by the Scheduled Acceptance Date and
within the Fixed Design/Build Price included in the Service
Contract.
8. The Acceptance Test is sufficient to predict that the Project will
perform reliably for the Operation Period of the Service Contract
and beyond for the full term of the Bonds. This opinion is based
upon the assumption that the required preventative and scheduled
maintenance is performed in accordance with industry standards.
9. The operation and maintenance requirements of the Project under the
Service Contract are adequate for the full term of the Bonds. The
operating costs included in the Service Contract are reasonable, and
the variable replacement cost for membranes will not have a
significant cost impact to the annual operating costs. The only
other variables are labor and chemicals and experience indicates
that any variation in these costs should be minor.
10. All of the required permits and easements to begin construction were
obtained prior to the commencement of construction, which occurred
on November 25, 2002. The remainder of the permits and easements to
complete construction will be acquired on a sequential basis prior
to the construction of the various components of the Project. These
outstanding permits and easements are identified and expected to be
obtained in time to prevent any delay to construction of the
Project. The operating permits required to comply with the Finished
Water date of December 4, 2004, under the Metropolitan Agreement are
identified and scheduled to be obtained in sufficient time to
support the completion of the Project. Based upon a review of the
preliminary construction schedule for the Project, there is
sufficient time to obtain these permits prior to the
December 4, 2004 MWD Finished Water date.
11. The safety plan is adequate and is in compliance with industry
requirements and the California Occupational Safety and Health Act.
12. The security plan is adequate and is in compliance with all
regulatory agencies on the local and state level.
13. Based upon a review of the Project Agreements (as defined in the
Independent Engineer's Report), the terms of the Project Agreements
will allow the DB/Operator to meet its obligations under the Service
Contract.
14. The preliminary construction schedule is reasonable and includes
sufficient contingency in the activity durations in order to
complete the Project within the parameters of the Metropolitan
Agreement and the Service Contract.
33
15. The Project can be constructed for the Fixed Design/Build Price
included in the Service Contract and the construction milestone
payment schedule is reasonable.
16. The operations cost included in the Service Contract is sufficient
to operate and maintain the Project for the Operation Period of the
Service Contract.
See Section IX of the Independent Engineer's Report entitled "ASSUMPTIONS AND
CONSIDERATIONS USED" and Section X of the Independent Engineer's Report entitled
"CONCLUSIONS" attached hereto as Appendix G.
No assurance can be given that the assumptions on which the foregoing
opinions were based will prove correct or that actual results of any matters
covered by the Independent Engineer's Report will not be materially different
than the projections and opinions set forth above or otherwise contained in the
Independent Engineer's Report.
THE AUTHORITY
The Authority is a public entity organized pursuant to a Joint Exercise of
Powers Agreement Creating the San Juan Basin Authority, dated as of
November 22, 1971, by and between the South Coast Water District ("SCWD"), the
Moulton Niguel Water District ("MNWD"), the Water District and the Santa
Margarita Water District ("SMWD"), as amended effective September 1, 1987 by
Addendum No. 1 to the Joint Exercise of Powers Agreement and Addendum No. 3
dated as of September 1, 2002, pursuant to the provisions of the Joint Exercise
of Powers Act contained in Chapter 5 of Division 7 of Title 1 (commencing with
Section 6500) of the California Government Code. The Authority presently has no
outstanding debt other than the Bonds, but does participate in activities
relating to the funding of water system facilities and water conservation
projects necessary to conserve and make water resources available to the areas
within the San Juan Creek Watershed serviced by the members of the Authority and
may incur debts, liabilities and other obligations unrelated to the Bonds. Since
the Authority is engaged in operations and other transactions besides the
issuance of the Bonds, should the Authority become the subject of a bankruptcy
case, there could be adverse effects on the holders of the Bonds that could
result in delays or reductions in payments to the holders of the Bonds.
THE WATER DISTRICT
INTRODUCTION
The Water District, formerly known as the Orange County Waterworks
District No. 4, is a water district formed in 1930 pursuant to the Water Code,
Section 55000 et seq., to serve the San Juan Capistrano area. The Water District
was originally governed by the Board of Supervisors of the County until 1970
when the Water District became a subsidiary water district of the City. On June
15, 1982, the Board of Supervisors adopted Resolution No. 82-6-15-2 changing the
name of Water District to its current name. The Water District still operates
under the provisions of the Water Code but is now governed by a Board of
Directors comprised of the five-member City Council of the City (the "Board of
Directors"). On July 1, 1997, the Water District entered into an operations and
maintenance agreement (the "Operations and Maintenance Agreement") with the City
wherein the City assumed the daily operational and maintenance management
functions of the Water District. Subsequently, all Water District employees
became full-time employees of the City. The Water District has the power under
the Water Code to, among other things, provide water service within its
boundaries.
34
GOVERNANCE AND MANAGEMENT
The Water District is governed by a five-member Board of Directors.
Pursuant to the Water Code, the City Council of the City (a five-member elected
body) sits as the Board of Directors of the Water District. The members of the
Board, their occupations, and the expiration date of their terms are as follows:
Name and Office Expiration of Term Occupation
- --------------- ------------------ --------------------------
Diane Bathgate November 2006 Urban Planner/Consultant
Joe Soto November 2004 Environmental Consultant
Wyatt Hart November 2006 Parole Board Member
David Swerdlin November 2006 Consultant
John S.Gelff November 2004 Strategic Planner/Educator
Under the Operations and Maintenance Agreement, the Water District is
operated by the City's Public Works Department. Management of the Water District
is delegated to the City Manager and General Manager of the Water District,
George Scarborough, the City Administrative Services Director, Cindy Russell,
and other staff of the City. The background of the key management personnel are
set forth below.
George Scarborough, City Manager and General Manager of the Water
District. Mr. Scarborough was employed by the City in 1988 as Assistant City
Manager and appointed as City Manager in 1992. Mr. Scarborough is responsible
for the day-to-day management of all functions of the Water District. Prior to
working for the City, Mr. Scarborough was employed as City Manager of the City
of Los Altos Hills and Greenfield, California. Mr. Scarborough is a member of
the International City Manger's Association.
Cindy Russell, City Administrative Services Director. Ms. Russell was
employed by the City in 1986. Ms. Russell is responsible for planning,
coordinating and administering the administrative, financial and business
operations of the Water District under the general direction of the General
Manager. Prior to working for the City, Ms. Russell worked for a public
accounting firm providing municipal audits. Ms. Russell is a member of the
California Society of Municipal Finance Officers, Government Finance Officers of
the United States and Canada and the California Municipal Treasurer's
Association.
In addition, the Water District operations include approximately
twenty-five other full-time positions, including 6 customer service positions
and nineteen regular maintenance and operations positions. There are two union
represented employees groups. The general classified employees are represented
by the San Juan Capistrano Employees Association and their current contract
expires on June 30,2004. Employees considered to be in middle management are
represented by the San Juan Capistrano Management Employees Association and
their current contract expires on June 30, 2003. Executives are not represented
by a labor union.
MERGER
In 1996, the City filed a reorganization application with LAFCO for the
purpose of formally merging the Water District with the City. As of the date of
this Official Statement, LAFCO has finalized its review of the final condition
of approval. The City anticipates that it will authorize LAFCO to file a Notice
of Completion with the State of California in the month of January, 2003, after
which the Water District will become officially merged with the City. After
completion of the merger, the City will assume all rights and obligations of the
Water District subject to the same limitations applicable to the
35
Water District. For general information regarding the City, see Appendix
I--"GENERAL INFORMATION CONCERNING THE CITY OF SAN JUAN CAPISTRANO."
SERVICE AREA; OVERVIEW OF WATER SYSTEM FACILITIES
The Water District is located in Orange County, California, midway between
Los Angeles and San Diego, approximately 1 mile east of Dana Point Harbor, and
serves an area of approximately 18 square miles, the majority of which is within
the incorporated boundaries of the City. For general information regarding the
City, see Appendix I--"GENERAL INFORMATION CONCERNING THE CITY OF SAN JUAN
CAPISTRANO." The remaining portion of the Water District, approximately 3% of
the service area or 1,000 connections, falls within the neighboring city of Dana
Point. The approximate boundaries of the Water District are the City of Dana
Point to the south; the City of Mission Viejo to the north; the City of Laguna
Niguel to the west; and Rancho Mission Viejo to the east.
The Water District provides water service for residential, commercial,
industrial, agricultural and municipal customers. During the 1970's and 1980's,
the Water District underwent gradual residential development and is currently
almost completely developed. The Water District currently serves a population of
approximately 35,500, and expects its service area population to grow to
approximately 41,725 (expected to be reached in 2020) and then stabilize. The
total number of active accounts is 10,622. The majority of the service area
consists of residential land use (42%) and open space (46%). Strip commercial
development is typical along Camino Capistrano, Ortega Highway, the central
downtown area and in isolated pockets along Rancho Viejo Road. This makes up
about three percent of the Water District's total service area. Other land uses
include agriculture (5%) and public/institutional (2%).
Elevations within the Water District vary between 15 feet and 880 feet
above mean sea level. Because of the uneven terrain, the three creeks that cross
the service area, and scattered development, the existing water distribution
system is very complex. The Water District currently serves seven distinct
pressure zones defined by reservoirs, and 26 sub-pressure zones served through
pressure regulating stations and hydropneumatic systems. The Water District's
system consists of approximately 174 miles of pipeline, 11 reservoirs with an
aggregate storage capacity equal to approximately 14.95 million gallons, 10
booster stations to lift water from lower pressure zones to higher pressure
zones for distribution and storage and to pressurize hydropneumatic systems, and
five sources of water supply. For information regarding the Water District's
sources of water supply, see "--Sources of Water Supply" immediately below.
SOURCES OF WATER SUPPLY
Capacity Rights. The Water District utilized local groundwater as its sole
source of supply until 1965 when imported water became available. Presently, the
Water District primarily relies upon imported water purchased from MWD through
MWDOC. Of the approximately 3.3 billion gallons of water the Water District
delivered to its customers in Fiscal Year 2001-02, 90.8% was surface water
purchased from MWD through MWDOC. The remaining water was supplied from local
groundwater sources.
The total capacity available through imported sources is currently 21.9
cubic feet per second ("cfs"). Of this, up to 15 cfs may be supplied through the
Allen McCollugh Pipeline at the Eastern Transmission Main turnout, referred to
as the Master Meter. This turnout is situated in the north central area of the
Water District at Camino Capistrano, north of Avery Parkway. It is the main
source of water to the service area.
In addition, 4.9 cfs is available through a connection to the South County
Pipeline through turnout SC-04, located in the eastern portion of the Water
District, near Ortega Highway and Avenue La
36
Pata. The Water District leased these capacity rights pursuant to an interim
license and lease of capacity agreement, entered into on October 22, 1992, with
MWDOC. In Fiscal Year 1994-95, the Water District negotiated a lump sum payment
of $456,126 with MWDOC to complete the purchase of such capacity rights. The
capacity rights are being amortized over 60 years.
Lastly, 2 cfs is available through a leased interconnection with MWDOC at
Del Obispo Street. This connection is used to maintain pressures in the southern
portion of the 250 pressure zone during high demand periods.
The remaining water needs are currently supplied from wells that pump
groundwater from the San Juan Basin. The Water District currently operates two
domestic wells (Rosenbaum Well No. 1 and North Area Well) and two non-domestic
wells (Mission Street and Hollywood Wells) with a total capacity of
approximately 3.2 cfs. For information regarding additional groundwater rights
allocated to the Project in connection with the development of the Project by
the Water District, see "THE PROJECT--Project Water Rights and Implementation
Agreement" above and "--Future Water Supply" below. Although there are a number
of private water companies currently operating small farming or ranching
enterprises within the Water District's boundaries, these private water
companies have water rights that are subordinate to the Water District's and
thus do not represent competition for Water District resources.
The table that follows summarizes water sources generally used by the
Water District to supply water to its customers:
TABLE NO. 1
CAPISTRANO VALLEY WATER DISTRICT
WATER SOURCES
Capacity
Source Name Location (Supply Points) Rights Area Served
- ----------- --------------------- --------------------------- ---------------- ---------------
Imported Allen McCollugh Camino Capistrano North of 15.0 cfs Entire District
Pipeline-Master Meter Avery Parkway
(CM-100)
Imported South County Pipeline Ortega Highway at Avenue La 4.9 cfs Entire District
(SC-04) Pata
Imported Del Obispo Connection Del Obispo Street 2.0 cfs (leased) Entire District
Groundwater Rosenbaum Well No. 1 Rancho Viejo Road South of 1.0 cfs Entire District
Village Road
Groundwater North Area Well North Open Space Area of 0.5 cfs Entire District
Camino Capistrano
Groundwater Mission Street Well Mission Street East of Lobo 1.0 cfs Entire District
Groundwater Hollywood Well Avenue De La Vista North of 0.7 cfs Entire District
Mission Street
- ----------
Source: The Water District.
In addition, the Water District maintains two interconnections with its
neighboring agencies, SCWD and the City of San Clemente, which are used only in
emergency situations.
37
Historic Water Deliveries. Over the past five full Fiscal Years (Fiscal
Year 1997-98 through Fiscal Year 2001-02), the Water District has delivered to
its customers, on average, 3.0 billion gallons, or 9,236 acre-feet of water per
year. The following table summarizes historic water deliveries in acre-feet for
Fiscal Years 1992-93 through 2001-2002.
TABLE NO. 2
CAPISTRANO VALLEY WATER DISTRICT
HISTORIC WATER DELIVERIES
(in acre-feet)
Fiscal Year Imported Water Total Water
Ending June 30, Delivered Groundwater Delivered Delivered
--------------- -------------- --------------------- -----------
1993 5,797 1,830 7,627
1994 5,884 1,634 7,518
1995 5,746 1,371 7,117
1996 6,695 1,418 8,113
1997 7,229 1,433 8,662
1998 6,808 1,220 8,028
1999 7,401 1,276 8,677
2000 8,761 1,177 9,938
2001 8,004 1,689 9,693
2002 8,946 898* 9,844
- ----------
*The Water District has primarily been utilizing wells located in the Trabuco
Creek sub-basin as its source of groundwater which produced less water in Fiscal
Year ended June 30, 2002 due to drought conditions. The alluvial aquifer system
in the Trabuco Creek sub-basin is narrower and thinner than the aquifer along
San Juan Creek which is where the wells for the Project will be located. See
Section 3.3.3 of the Independent Engineer's Report entitled "--Groundwater
Basins" attached hereto as Appendix G.
Source: The Water District.
FUTURE WATER SUPPLY.
Domestic Water Master Plan. The Water District's Domestic Water Master
Plan, dated May, 1999 (the "Domestic Master Plan"), provides for the local
distribution of potable water. The primary function of the Domestic Master Plan
is to identify the facilities that will allow for adequate storage and fire
flow, and increase system reliability, and a key component of the plan is the
Groundwater Recovery Plant. Once constructed and fully operational, it is
anticipated that the Groundwater Recovery Plant will supply approximately
one-half of the Water District's annual water supply requirements, assist the
Water District in meeting its goal of securing fifty-percent of its annual water
supply from local groundwater sources, and eliminate the need to increase the
Water District's import capacity and will avoid the cost of additional capacity
from suppliers. Additionally, the development of local groundwater sources from
the operation of the Groundwater Recovery Plant is expected to significantly
reduce the need to provide additional emergency reservoir storage. See "THE
PROJECT--Overview." See Table No. 7 below entitled "Projected Water Usage" for a
comparison of groundwater and imported water. The projected costs of obtaining
water through the Groundwater Recovery Plant are included in Table No. 9 below
entitled "Projected Operating Results", as Operating Expenses. For further
information regarding the Groundwater Recovery Plant, see "THE PROJECT."
Non-Domestic Water Master Plan. The Water District's Non-Domestic Water
Master Plan (the "Non-Domestic Master Plan") provides for local distribution and
increased supply of non-potable water. In order to expand the non-domestic
system to meet projected demand, the Water District expects to maximize its
groundwater supply and add reclaimed water. The Water District has water rights
to 1,825
38
acre feet per year of non-potable to be shared between the City and the Water
District for the non-domestic system. The Non-Domestic Master Plan provides for
three new non-potable well sites in the San Juan Basin area to bring additional
water to the Water District's system. The Non-Domestic Master Plan also provides
for the construction of new treatment facilities at the Southeast Regional
Reclamation Authority's Jay R. Latham Wastewater Treatment Plant. These new
facilities would be required to produce high quality reclaimed water, and comply
with the Title 22 Wastewater Reclamation Criteria set forth by the State
Department of Health Services. The Non-Domestic Master Plan also recommends that
the Water District pursue the purchase of excess reclaimed water either from
MNWD or SMWD in order to increase the Water District's supply of reclaimed water
on an interim basis or as an emergency inter-tie.
South Orange County Reliability Study. The Water District is participating
in the South Orange County Reliability Study being conducted by MWDOC. The
purpose of the study is to develop alternatives to improve water reliability in
the event of emergency, drought and increased water demand. The emergencies
considered by the study include certain failures in the Deimer filtration plant
or at any of the pipelines, pump stations, or reservoirs in the system. In such
event, each water agency in the South Orange County area and the Water District
would have to rely on its own capacity. The study seeks to investigate regional
joint projects which could provide water during a lack of local capacity. In the
event of drought, MWD would reduce its allocation to MWDOC, and MWDOC would in
turn reduce its allocation to the Water District. The goal of the reliability
study is to develop concepts for projects such as groundwater banking, or
desalinization that would reduce the impact of a MWD drought reduction.
Increases in water demand have an impact on the reliability of the system under
any conditions. The study analyzes increased demand and attempts to more
accurately project increases.
SERVICE CONNECTION INFORMATION
The following table represents a summary of average service connections to
the Water System for Fiscal Years 1997-98 through 2001-02.
TABLE NO. 3
CAPISTRANO VALLEY WATER DISTRICT
SERVICE CONNECTIONS
Fiscal Year
Ending June 30, Service Connections Percent Increase
- --------------- ------------------- ----------------
1998 10,110 1.6%
1999 10,463 3.5
2000 10,582 1.1
2001 10,622 0.4
2002 10,777 1.5
- ----------
Source: The Water District.
LARGEST CUSTOMERS
The Water District provides metered water service to all of its customers.
The Water District estimates approximately 65% of water provided within the
Water District is consumed by single family residences and reports that the
largest water bills are paid by golf courses, parks, commercial and governmental
or institutional properties. The Water District's top ten users for Fiscal Year
ended June 30,2002, are as follows:
39
TABLE NO. 4
CAPISTRANO VALLEY WATER DISTRICT
TEN LARGEST USERS
(FISCAL YEAR ENDED JUNE 30, 2002)
Customer Name Annual Dollars Activity % of Total
- ---------------------------- -------------- ---------------- ----------
Marbella Golf & Country Club $ 164,440 Golf Course 2.6%
City of San Juan Capistrano 162,544 Landscaping 2.5
Capo Villas III HOA 135,310 HOA - Condos 2.1
Village San Juan HOA 74,228 HOA - Various 1.2
San Juan Hills Estates HOA 69,686 HOA - SFR 1.1
San Juan Mobile Estates 39,296 Mobile Home Park 0.6
Casitas De Alipax HOA 38,748 HOA - Condos 0.6
EI Nido 24,891 Mobile Home Park 0.4
Rancho Del Avion 24,420 Mobile Home Park 0.4
Capistrano Valley Mobile
Estates 20,380 Mobile Home Park 0.3
- ----------
Source: The Water District.
RATES AND CHARGES; COLLECTION
Rates and Charges. The Water District's rates and charges are approved by
the Board of Directors of the Water District from time to time and are not
subject to the approval of the voters or any outside governmental agency or
body. See, however, the caption "--Proposition 218" below for a discussion of an
enacted state initiative which could affect the ability of the Board of
Directors to increase rates and charges.
The Water District's rates and charges generally consist of a commodity
charge and a monthly service charge. The commodity charge is based on volume of
water consumed. Billing is in hundred cubic feet ("ccf"). The commodity rates
are based on customer classes and a three-tiered allocation system. In general,
each customer class is allocated water based on a combination of an indoor
allocation and an outdoor allocation of water. The indoor allocation is applied
equally to each month whereas the outdoor allocation is calculated each monthly
billing period based upon local weather data for the actual days in the billing
period. Use above the combined indoor and outdoor allocation is penalized by a
higher commodity rate. Customers are charged one commodity rate up to their
allocated volume, a second rate for water use above their allocated volume up to
twice such allocation, and a third rate for water use above twice their
allocation. The monthly service charge is a fixed charge billed to cover the
costs of meter reading, billing, postage and some of the fixed costs of
production and fire protection.
For budgeting purposes, the Water District generally sets rates to cover
operating expenses and to finance general administrative expenses, capital
projects, and debt service. The Water District staff provide estimates of
revenues and expenditures for operations for the upcoming Fiscal Year in June to
the Board of Directors of the Water District. The Board of Directors conducts
public meetings and makes such revisions as it deems desirable, adopting the
proposed budgets for the following Fiscal Year effective as of July 1 of such
Fiscal Year. The Board of Directors adopted its operating budget for Fiscal Year
2002-03 on June 18,2002. The Water District's budget is prepared on a cash
basis.
The average monthly bill for Fiscal Year 2001-02 for all sizes of
single family homes was $40.96. The table below lists the percentage rate
increases approved by the Board of Directors of the Water District over the
last four Fiscal Years and for Fiscal Year 2002-03 for single family
residences.
40
TABLE NO. 5
CAPISTRANO VALLEY WATER DISTRICT
WATER SYSTEM RATES AND CHARGES-SINGLE FAMILY RESIDENCES
Fiscal Year Ending Tier l Tier 2 Tier 3 Service Percent
June 30, (per ccf) (per ccf) (per ccf) Charge Increase
- ------------------ --------- --------- --------- ------- --------
1999 $ 1.23 $ 1.55 $ 2.59 $ 6.15 --
2000 1.24 1.57 2.62 6.21 1.0%
2001 1.25 1.59 2.65 6.27 1.0
2002 1.33 1.70 2.82 6.67 6.3
2003* 1.41 1.81 3.00 7.09 6.3
- ----------
* Fiscal Year 2002-03 water rates and charges were approved by the Board on
October 1,2001.
Source: The Water District.
On December 17, 1999, the Water District adopted a 20-year rate plan to
finance the Domestic Master Plan. This rate plan provides for rates to increase
by approximately 1% in each Fiscal Year from Fiscal Year 2002-2003 through
Fiscal Year 2019-2020. In addition, on October 2, 2001, the Water District
adopted a five-year rate plan to provide for rate increases necessary to meet
operation and maintenance expenses. The new rate plan further increased rates as
of October 2, 2001 by 5.3% and by another 5.3% on July 1, 2002. The plan also
provides for an increase of 2.25% each July 1st from Fiscal Year 2003-04 through
Fiscal Year 2005-06.
It is expected that the Groundwater Recovery Plant will commence
operations by December 4, 2004. It is expected that the costs associated with
the Groundwater Recovery Plant will require an additional rate increase at the
inception of plant operations. The projected rate increase is estimated to be
approximately 14 to 15%. See also "--Sources of Water Supply--Future Water
Supply--Domestic Water Master Plan" above.
See Table 6 below "Comparative Rates" for a comparison of water rates
charged in surrounding areas effective as of October 1,2002.
[Remainder of page intentionally left blank.]
41
TABLE NO. 6
CAPISTRANO VALLEY WATER DISTRICT
COMPARATIVE RATES*
$ per 20ccf of
Agencies Water Service Provider Average Usage
- ------------------- -------------------------------- --------------
City of Irvine Irvine Ranch Water District $ 19.98
Laguna Niguel Moulton Niguel Water District 20.00
Lake Forest El Toro Water District 30.50
San Juan Capistrano Capistrano Valley Water District 35.29
Mission Viejo Santa Margarita Water District 35.86
Costa Mesa Mesa Consolidated Water District 40.20
Trabuco Canyon
(Unincorporated) Trabuco Canyon Water District 48.05
San Clemente City of San Clemente 50.88
Laguna Beach Laguna Beach Water District 57.50
Dana Point South Coast Water District 61.72
- ----------
* Higher of two seasonal rates quoted, if applicable.
Sources: Municipal Water District of Orange County.
Collection. All customers are billed monthly during the year. Payments are
due and payable on the date rendered and become delinquent at the next scheduled
read date, approximately 30 days thereafter. The late charge assessed is 8%. If
not paid within 45 days, service may discontinued. A reconnection charge,
payment for deposit, equal to twice the average monthly bill, and the entire
bill must be paid in full before service will be re-established. The rate of
delinquencies has remained consistent for several years. Bad debt write-offs for
unpaid closing bills is approximately 0.25% of total revenue. Over the last five
years, 96% of all customers have paid on time with four percent receiving a late
charge delinquent notice and 0.47% experiencing water service shut-off prior to
collection.
PROPOSITION 218
Impact of Proposition 218 on Water Service Rates and Charges. On November
5, 1996, the voters of the State approved Proposition 218, the so-called "Right
to Vote on Taxes Act." Proposition 218 added Articles XIIIC and XIID to the
State Constitution, which contain a number of provisions affecting the ability
of local governments to levy and collect both existing and future taxes,
assessments, fees and charges.
Article XIIID conditions the imposition or increase of any "fee" or
"charge" upon there being no written majority protest after a required public
hearing and, for fees and charges other than for sewer, water or refuse
collection services, voter approval. Article XIIID defines "fee" or "charge" to
mean levies (other than ad valorem or special taxes or assessments) imposed by a
local government upon a parcel or upon a person as an incident of the ownership
or tenancy of real property, including a user fee or charge for a
"property-related service." One of the requirements of Article XIIID is that
before a property related fee or charge may be imposed or increased, a public
hearing upon the proposed fee or charge must be held and mailed notice sent to
the record owner of each identified parcel of land upon which the fee or charge
is proposed for imposition. In the public hearing if written protests of the
proposed fee or charge are presented by a majority of the owners of affected
identified parcel(s), an agency may not impose the fee or charge.
The Water District's water charges have two components, a base fee based
on meter size and a commodity charge based on the volume of water consumed. In
July 1997, the Attorney General of the State of California issued an opinion to
the effect that Article XIIID does not apply to water fees or
42
charges which are based on the volume of consumption. In an intermediate
appellate court decision issued in 2000, it was held that water service fees and
charges, where based primarily on consumption were not "fees" or "charges"
within the meaning of Article XIIID; in that case, the charge had two
components, a base charge and a variable charge based upon consumption. The
California State Supreme Court denied review of the case and has not otherwise
considered the issue directly. The Water District is of the view that the water
and capacity fees and charges are not subject to Article XIID.
In addition, by July 1, 1997, under Article XIIID, all property-related
fees and charges, including those which have been in existence since prior to
the passage of Proposition 218 in November 1996, had to have met the following
substantive standards:
(1) Revenues derived from the fee or charge cannot exceed the funds
required to provide the property-related service.
(2) Revenues derived from the fee or charge must not be used for any
purpose other than that for which the fee or charge was imposed.
(3) The amount of a fee or charge imposed upon any parcel or person as
an incident of property ownership must not exceed the proportional cost of the
service attributable to the parcel.
(4) No fee or charge may be imposed for a service unless that service is
actually used by, or immediately available to, the owner of the property in
question. Fees or charges based on potential or future use of a service are not
permitted. Standby charges, whether characterized as charges or assessments,
must be classified as assessments and cannot be imposed without compliance with
Section 4 of Article XIIID (relating to assessments).
(5) No fee or charge may be imposed for general governmental services
including, but not limited to, police, fire, ambulance or library services where
the service is available to the public at large in substantially the same manner
as it is to property owners.
Even though the Water District believes that its water rates and capacity
charges are not subject to Article XIIID, the Water District believes that they
comply with the foregoing standards; provided, that it is unclear whether under
the foregoing standards rates and charges may be established at levels which
would permit deposits to a rate stabilization fund or maintenance of uncommitted
cash reserves.
Article XIIIC removes limitations on the initiative power in matters of
local taxes, assessments, fees and charges. Consequently, the voters of the
Water District could, by future initiative, repeal, reduce or prohibit the
future imposition or increase of any local tax, assessment, fee or charge.
"Assessment," "fee" and "charge" are not defined in Article XIIIC and it is
unclear whether the definitions of such terms contained in Article XIIID (which
are generally property-related as described above) are so limited under Article
XIIIC. No assurance can be given that the voters of the Water District will not,
in the future, approve initiatives which repeal, reduce or prohibit the future
imposition or increase of assessments, fees or charges, including the Water
District's water service fees and charges, which are the primary sources of
Revenues pledged to the payment of the Lease Payments securing the Bonds.
The interpretation and application of Proposition 218 will ultimately be
determined by the courts or through implementing legislation with respect to a
number of the matters discussed above, and it is not possible at this time to
predict with certainty the outcome of such determination or the nature or scope
of any such legislation.
43
Effect of Proposition 218 and of Possible General Limitations on
Enforcement Remedies. The ability of the Water District to comply with its
covenants under the Lease Agreement and to generate Revenues sufficient to pay
the Lease Payments thereunder, and ultimately the payment of the principal of
and interest on the Bonds, may be adversely affected by actions and events
outside of the control of the Water District and may be adversely affected by
actions taken (or not taken) under Article XIIIC or Article XIIID by voters,
property owners, taxpayers or payers of assessments, fees and charges.
Furthermore, any remedies available to the owners of the Bonds upon the
occurrence of an event of default under the Trust Agreement are in many respects
dependent upon judicial actions which are often subject to discretion and delay
and could prove both expensive and time consuming to obtain. In addition to the
possible limitations on the ability of the Water District to comply with its
covenants under the Lease Agreement, the rights and obligations under the Bonds,
the Trust Agreement, the Lease Agreement and the Property Lease may be subject
to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium and other laws relating to or affecting creditors' rights, to the
application of equitable principles, to the exercise of judicial discretion in
appropriate cases and to limitations on legal remedies against public entities
in the State of California.
Based on the foregoing, in the event the Water District fails to comply
with its covenants under the Lease Agreement, including its covenants to
generate sufficient Revenues, as a consequence of the application of Article
XIIIC and Article XIIID, or to pay the Lease Payments thereunder, and thus
ultimately effect the payment of principal or interest on the Bonds, there can
be no assurance that available remedies will be adequate to fully protect the
interests of the holders of the Bonds. None of the Property subject to the Lease
Agreement or the improvements thereon or the Water System are pledged or
available to the Trustee or the Bondowners in the event of termination of the
Lease Agreement, default in the payment of Lease Payments or otherwise, and no
default under Lease Agreement will result in the loss of the Property or the
improvements thereon, the Water System or other assets of the Water District.
For information regarding other limitations on available remedies in the event
of a default under the Lease Agreement, see "SOURCES OF PAYMENT AND SECURITY FOR
THE BONDS--Limited Recourse on Default."
Future Initiatives. Article XIIIC and Article XIIID were each adopted as
measures that qualified for the ballot pursuant to the State's initiative
process. From time to time, other initiative measures could be adopted, which
may place further limitations on the ability of the Water District to increase
revenues or to increase appropriations which may affect the Water District's
Revenues or water rights or its ability to expend its Revenues.
[Remainder of page intentionally left blank.]
44
PROJECTED WATER USAGE
The following table lists the Water District's estimated water deliveries
for the current and the next four Fiscal Years.
TABLE NO. 7
CAPISTRANO VALLEY WATER DISTRICT
PROJECTED WATER USAGE (ACRE-FEET)
Fiscal Year
Ending June 30, Groundwater Imported Water Total Water Usage
- --------------- ----------- -------------- -----------------
2002 898 8,946 9,844
2003 911 9,080 9,991
2004 1,400 8,740 10,140
2005 3,800 6,492 10,292
2006 6,200 4,246 10,446
- ----------
Source: The Water District.
REGULATORY REQUIREMENTS
Federal Requirements. The Water District is subject to regulations imposed
by the federal Safe Drinking Water Act, as amended (the "Act"), which is
administered by the Environmental Protection Agency ("EPA"). In 1986, the United
States Congress passed amendments to the Act, wherein 83 potential contaminants
of potable water were to be regulated by no later than 1989, with 25 new
contaminants to be added, prioritized and regulated every three years
thereafter. In 1996, the Act was amended again, reducing the number to five new
regulated contaminants every five years. The 1996 amendments also require that
each regulation be reviewed every six years to determine if a revision is
warranted. In addition to setting maximum levels for contaminants, the Act also
allows regulations to require water treatment plants to meet defined "Treatment
Techniques."
Other new regulations that are currently proposed impact water treatment
are the Arsenic, Radon, Sulfate, Groundwater and Filter Backwash Rules. It is
anticipated that new regulated contaminants, plus the continued revision of
current regulations, will impact treatment costs and possibly require advance
treatment processes. The fiscal impact of these proposed regulations is unknown
to the Water District.
State Regulations. As an operator of a municipal water system, the Water
District is responsible for complying with various state requirements,
including: operational requirements; design and construction standards for dams
and reservoirs, distribution systems and pipelines; requirements for control of
cryptosporidium and other water safety issues; and training and other
requirements for water treatment and distribution operators. Failure to meet
these standards may subject the Water District to civil or criminal sanctions.
Water District Compliance. The Water District believes its water is
currently meeting or exceeding all present and proposed Federal and State water
quality standards. The Water District does not expect water quality in its
groundwater basin to diminish. The Water District cannot, however, predict
whether future Federal and State water quality standards may result in a need
for additional or enhanced treatment facilities.
45
WATER DISTRICT FINANCIAL INFORMATION
OUTSTANDING INDEBTEDNESS
Water District Indebtedness. The Water District entered into the
Installment Purchase Agreement in connection with the execution and delivery of
the 2002 Certificates of Participation in aggregate principal amount of
$8,525,000. The Water District agrees in the Lease Agreement that its pledged of
the Revenues to the payment of the Lease Payments is, subject to the limitations
described above under the caption entitled "SOURCES OF PAYMENT AND SECURITY FOR
THE BONDS--Pledge of Revenues," senior to its pledge of net revenues to the
payment of the Installment Payments scheduled to be paid by the Water District
under and pursuant to the Installment Purchase Agreement. See "SOURCES OF
PAYMENT AND SECURITY FOR THE BONDS--Lease Payments" and "--Pledge of Revenues."
The Installment Agreement provides that the Installment Payments be made by the
Water District according to the following schedule:
Annual Period
(December 31) Principal Interest Total
- ------------- ----------- -------------- ---------------
2002 $ 220,000 $ 246,299.43 $ 466,299.43
2003 315,000 364,853.76 679,853.76
2004 320,000 353,828.76 673,828.76
2005 330,000 342,628.76 672,628.76
2006 340,000 331,078.76 671,078.76
2007 350,000 319,178.76 669,178.76
2008 360,000 306,928.76 666,928.76
2009 370,000 293,428.76 663,428.76
2010 385,000 278,998.76 663,998.76
2011 400,000 263,213.76 663,213.76
2012 415,000 246,713.76 661,713.76
2013 435,000 229,076.26 664,076.26
2014 455,000 209,936.26 664,936.26
2015 475,000 189,461.26 664,461.26
2016 495,000 167,492.50 662,492.50
2017 520,000 143,732.50 663,732.50
2018 545,000 118,382.50 663,382.50
2019 570,000 91,132.50 661,132.50
2020 595,000 62,632.50 657,632.50
2021 630,000 32,287.50 662,287.50
----------- -------------- ---------------
Totals $ 8,525,000 $ 4,591,285.81 $ 13,116,285.81
In addition, the Water District currently has one series of general
obligation bonds outstanding, which are not payable from Revenues. See Appendix
A--"FINANCIAL STATEMENTS OF THE WATER DISTRICT."
Future Water District Indebtedness. The Water District's Domestic Master
Plan provides for $27 million in improvements to the Water System as well as an
allocation $13.2 million for replacement projects. These improvements and
replacements are projected to be funded through a combination of developer
impact fees, property taxes and financing. Developer Fees relating to these
projects are anticipated to be approximately $13.2 million. Property taxes are
projected at $15 million. This leaves $12 million to be financed by the Water
District through water rates. The Water District issued the first series of debt
in April 2002 resulting in net proceeds of $7.75 million. In addition, the Water
District currently anticipates incurring approximately $2.7 million in debt in
Fiscal Year 2007-08, and $2 million
46
in Fiscal Year 2010-11 to finance the completion of capital facilities under the
Domestic Master Plan. Such debt would be on a parity with the 2002 Certificates
of Participation and, to the extent the Lease Payments required under the Lease
Agreement exceed the Maintenance and Operation Cap, on a parity with the Lease
Payments. See "SOURCES OF PAYMENT AND SECURITY FOR THE BONDS--Lease Payments"
and "--Pledge of Revenues." It is possible that the Water District could issue
more or less debt than currently anticipated.
HISTORIC OPERATING RESULTS
The following table sets forth a summary of Water System operating results
of the Water District for the last five Fiscal Years. The information set forth
in the table has been derived by the Water District from its audited financial
statements for such Fiscal Years 1997-98 through 2000-01 and its unaudited
financial statements for Fiscal Year 2001-02, but excludes certain non-cash
items and certain other adjustments. Copies of the audited financial statements
of the Water District for Fiscal Years ended June 30, 2001 and 2000, including
the unqualified opinion letters of Moreland & Associates, Inc. (the "Auditor")
are included as Appendix A hereto. The following summary for the Fiscal Years
ended June 30 for the years indicated is qualified in its entirety by reference
to such statements for such years, including the notes thereto. See also
"--Management Discussion and Analysis" below for managements' analysis of Table
No. 8. The Auditor has not reviewed the information set forth in the following
table.
[Remainder of page intentionally left blank.]
47
TABLE NO. 8
CAPISTRANO VALLEY WATER DISTRICT
HISTORICAL REVENUES AND EXPENDITURES
Fiscal Year Ended June 30,
1998/(1)/ 1999/(1)/ 2000/(1)/ 2001/(1)/ 2002/(2)/
------------ ------------ ------------ ------------ ------------
OPERATING REVENUES
Charges for Services/(3)/ $ 5,200,256 $ 5,705,782 $ 6,360,246 $ 5,923,062 $ 6,625,573
Development Service Charges/(4)/ 28,316 10,667 40,945 61,068 13,995
Other Income/(5)/ 139,541 99,932 321,444 8,097 156,684
------------ ------------ ----------- ------------ ------------
Total Operating Revenues $ 5,368,113 $ 5,816,381 $ 6,722,635 $ 5,992,227 $ 6,796,252
OPERATING EXPENSES
Total Operation and Maintenance
Expenses/(6)/ $ 6,496,935 $ 7,337,488 $ 7,736,030 $ 8,228,985 $ 8,151,971
Net Water System Revenues (1,128,822) (1,521,107) (1,013,395) (2,236,758) (1,355,719)
Non-Operating Revenues/(7)/ 1,078,961 1,167,743 2,143,592 1,918,579 963,146
Depreciation on Contributed Assets 178,753 178,753 178,825 177,252 177,252
Net Revenues $ 128,892 $ (174,611) $ 1,309,022 $ (140,927) $ (215,321)
- ----------
/(1)/ Derived from Water District's audited financial statements.
/(2)/ Derived from Water District's unaudited financial statements for Fiscal
Year 2001-02.
/(3)/ Includes revenue from water sales, customer service charges, sewer
collection fees, late payments and bad check charges.
/(4)/ Includes turn on/off charges and meter installation.
/(5)/ Includes bad debt, other revenues.
/(6)/ Includes water purchase and production, water operation and maintenance,
general and administrative, amortization and other expenses.
/(7)/ Includes investment income, capital improvement fees, property taxes,
grant revenues and gain on sale of property, less interest expense and
loss on joint venture.
Source: The Water District.
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion relates to certain information shown in Table
No. 8.
Charges for Services. Except for Fiscal Year 2000-01, water sale revenues
have increased annually from 1998 due to higher demand as a result of drought
conditions in the area and rate increases which began in December 1999. In
Fiscal Year 1999-00, water sales increased dramatically due to unusually hot
weather. In Fiscal Year 2000-01, although still very little rainfall, the
weather was unusually cool and water sales declined. Normal weather patterns
brought usage back up in 2002.
Other Operating Revenues. Development related revenues fluctuate with
development. Other income, which includes various reimbursements was unusually
high in Fiscal Year 1999-00 due to a release of funds held as part of the Orange
County bankruptcy. In 2002, a MWD rebate increased other income.
48
Operating Expenses. Operating Expenses have increased more than the
average of 3.5% from Fiscal Year 1997-98 to Fiscal Year 2001-02 primarily due to
an increase in water purchases, increased power costs and increased staff costs.
The Water District is in the fourth year of a drought. This year being the
driest year on record for the area. With the severe drop in rainfall, the Water
District has increased its import from 84% to 91% in the last five years. This
has resulted in additional cost above normal increases of $255,000.
In June 2000, San Diego Gas and Electric increased the cost of power
within the Water District by 75%. This resulted in an increase in power costs of
approximately $250,000. In November 2001, these rates were reduced, however the
Water District's power costs are still $150,000 than previously anticipated. See
also "--California Electricity Market" below.
In Fiscal Year 2000-01, the Water District added two new employees for a
total of $150,000 to provide administrative and engineering support to the Water
System.
Non-Operating Revenues. Property taxes have increased consistently each
year, while development revenues are tied to the housing market. Fiscal Years
1999-00 and 2000-01 included property sales and large fees from a 150 home
development.
PROJECTED OPERATING RESULTS
Estimated projected operating results (on a cash basis) for the Water
District for the current and next four Fiscal Years are set forth below. Certain
assumptions have been made by the Water District in the development of the
projections. Many of these assumptions are reflected in the footnotes
accompanying the projections. While the Water District believes its assumptions
are reasonable, there can be no assurance that the assumed conditions will in
fact occur. The forecasts constitute forward looking statements and are subject
to the cautions described on the inside cover page of this Official Statement.
The Water District's projections may be affected (favorably or unfavorably) by
unforeseen future events. Therefore, the results projected below are not to be
construed as representations of fact nor a guarantee of future performance.
[Remainder of page intentionally left blank.]
49
TABLE NO. 9
CAPISTRANO VALLEY WATER DISTRICT
PROJECTED OPERATING RESULTS
FISCAL YEARS 2002-03 THROUGH 2006-07
Fiscal Year Ending June 30,
2003/(1)/ 2004/(2)/ 2005/(2)/ 2006/(2)/ 2007/(2)/
-------------- ------------ ------------- ------------- -------------
OPERATING REVENUES:
Water Commodity/Service Charge/(3)/ $ 7,066,764 $ 7,405,880 $ 8,856,656 $ 9,281,665 $ 9,515,099
Sewer Service Charge 102,973 104,518 106,085 107,677 109,292
Other 29,300 29,740 30,186 30,638 31,098
Development Service Charge/(4)/ 23,775 60,222 60,316 60,412 60,509
Other Income/(5)/ 4,000 4,060 4,121 4,183 4,245
-------------- ------------ ------------- ------------- -------------
Total Revenues 7,226,812 7,604,419 9,057,364 9,484,575 9,720,243
OPERATING EXPENSES:
Total Operations and Maintenance Expenses/(6)/ 7,792,914 8,065,666 9,408,468 9,725,339 10,031,597
Plus Operating Depreciation/(7)/ 833,114 862,273 892,453 923,688 956,017
-------------- ------------ ------------- ------------- -------------
Net Water System Revenues 267,012 401,026 541,349 682,925 644,663
NON-OPERATING REVENUES:
Developer Revenues 380,111 387,713 395,467 403,377 411,444
Property Taxes/(8)/ 586,924 550,000 561,000 572,220 583,664
Interest Rentals 76,025 77,165 78,323 79,498 80,690
Other/(9)/ (42,794) 3,553 3,606 3,660 3,715
-------------- ------------ ------------- ------------- -------------
Total Non-Operating Revenues/(10)/ 1,000,266 1,018,431 1,038,396 1,058,754 1,079,514
Net Revenues Available for Debt Service 1,267,278 1,419,458 1,579,745 1,741,679 1,724,177
Debt Service on 2002 Certificates of Participation (559,071) (644,708) (638,596) (637,221) (635,496)
Net Revenues Available after Debt Service $ 708,207 $ 774,750 $ 941,149 $ 1,104,458 $ 1,088,681
============== ============ ============= ============= =============
Debt Service Coverage Ratio 227% 220% 247% 273% 271%
- ----------
/(1)/ Derived from Water District's Fiscal Year 2002-03 Adopted Budget.
/(2)/ Charges for service based on 1.5% annual growth and rate schedule
adopted October 2, 2001. See "THE WATER DISTRICT--Rates and charges;
Collection." Non-operating revenues increased by 2.0%. Expenses inflated
by 3.5%.
/(3)/ Fiscal Years 2004-05 through 2006-07 include additional amounts related
to the proposed Groundwater Recovery Plant.
/(4)/ Includes turn on/off charges and meter installation.
/(5)/ Includes bad debt and other revenues.
/(6)/ Includes water purchase and production, water operation and maintenance,
general and administrative, and amortization other expenses. Also,
Fiscal Year 2004-05 through Fiscal Year 2006-07 include additional
expenses related to the Groundwater Recovery Plant. The Groundwater
Recovery Plant costs include the Lease Payments under the Lease
Agreement.
/(7)/ Assumes 3.5% rate of growth in operating depreciation.
/(8)/ Fiscal Year 2002-03 includes voter approved property tax revenue to pay
debt services and expenses on general existing obligation bonds.
/(9)/ Fiscal Year 2002-03 includes debt service and expenses on existing
general obligation bonds.
/(10)/ Includes investment income, capital improvement fees, property taxes,
grant revenues and gain on sale of property, less interest expense and
loss on joint venture.
Source: The Water District.
50
WATER SYSTEM INSURANCE
The City is a member of the California Joint Powers Insurance Authority
(the "JPIA"). Under the Water District's contractual agreement for maintenance
and operations, the Water District falls under the City's coverage through the
JPIA. General Liability protection for each member is $50,000,000 per occurrence
and $50,000,000 annual aggregate. Property insurance coverage is $100,000,000.
The insurance coverage is an all-risk property protection program of the JPIA.
Blanket employee dishonesty and public official bonds are also provided through
the JPIA. These coverages extend to the Water District operations as well.
Worker's Compensation Insurance is carried by the State Compensation Fund for
work-related injuries. During the past three Fiscal Years none of the above
programs have had settlements or judgments that exceeded pooled or insured
coverage. There have been no significant reductions in pooled or insured
liability coverage from coverage in the prior year.
The Lease Agreement requires that the Water District procure and maintain
insurance on the Project with responsible insurers at reasonable cost in such
amount and against such risks (including damage to or destruction of the Service
Contract Project Improvements) as are usually covered in connection with
facilities similar to the Service Contract Project Improvements, but not less
than the lesser of the full replacement cost or the principal amount of Bonds
then outstanding, so long as such insurance is available from reputable
insurance companies. See Appendix C--"DEFINITIONS AND SUMMARY OF CERTAIN
PROVISIONS OF PRINCIPAL FINANCING DOCUMENTS--LEASE AGREEMENT--INSURANCE AND
CONDEMNATION--Insurance."
EMPLOYEE BENEFITS
On July 1, 1997, the Water District entered into an operations and
maintenance agreement with the City wherein the City assumed the daily
operational and maintenance management functions of the Water District.
Subsequently, all Water District employees became full-time employees of the
City. All full-time employees of the City, including those serving the Water
District, are eligible to participation in the Orange County Employees
Retirement System ("OCERS"). OCERS provides retirement, regular disability, and
survivor benefits for miscellaneous and safety group employees. All benefits
vest after five years. The benefit provisions and all other requirements are
established by State statutes. The payroll charged to the Water District for
employees covered by OCERS for the year ended June 30, 2002, was $1,515,882.
Total payroll was $6,013,990. Employees are required to contribute approximately
7% of their annual salary to OCERS. The City pays its portion, the employee
portion for management and executive employees, and up to 5.6% of the employees
portion for classified employees.
CALIFORNIA ELECTRICITY MARKET
General. Beginning in the Spring of 2000, the California energy market
experienced a severe imbalance between the supply of, and the demand for,
electricity causing the wholesale price of electricity to increase dramatically.
Due to a combination of mild weather, reduced natural gas prices, conservation
efforts, delays in power plant shutdowns for scheduled maintenance and the
introduction of a number of new power plants, the price of electricity in
California has stabilized since June, 2001. The imbalance of supply and demand
had its most significant impact on the short-term or spot market for the
purchase of electricity and so has had a material, adverse effect on the three
major California investor-owned electric utilities, Pacific Gas and Electric
Company ("PG&E"), Southern California Edison Company ("SCE") and San Diego Gas
and Electric Company ("SDG&E" and collectively with PG&E and SCE the "California
IOUs") which had to purchase their electric requirements in excess of their own
generation capacity as a result of the California electric industry deregulation
plan. As a result of the situation, the California IOUs experienced severe
financial difficulties, the California Department of Water Resources ("DWR") has
become a substantial supplier of electricity to the retail customers of the
California IOUs, state legislation has been enacted to stabilize the bills of
SDG&E customers, the rates of PG&E and SCE
51
customers have been substantially increased by the California Public Utilities
Commission (the "CPUC"), the Federal Regulatory Energy Commission ("FERC") has
instituted price caps on the price of wholesale electric energy and proceedings
with respect to potential refunds on wholesale power purchases, and a State
agency has been created to increase electric generation and transmission
facilities serving California, including State-owned facilities. To pay the
costs of DWR's purchases of electricity, the State has extended unsecured loans
from the State General Fund. The State has also authorized the issuance of up to
$13.4 billion of revenue bonds by DWR to reimburse such expenditures and to
provide funds for additional electricity purchases.
The California IOUs are net buyers of electricity. Following the
deregulation of the California energy markets under Assembly Bill 1980 (Chapter
854 of the Laws of 1996) ("AB 1890"), the California IOUs were purchasing
electricity at fluctuating short-term and spot wholesale prices while the retail
prices that they could charge their residential and small business customers
were capped at specified levels. During portions of 2000 and 2001, the market
price of electricity in California significantly exceeded such capped prices.
Under this structure, the creditworthiness of PG&E and SCE deteriorated to the
point they could no longer purchase electricity, and ultimately defaulted on
many of their obligations. Because the creditworthiness of the California
Independent System Operator Corporation (the "ISO"), the Independent System
Operator for the California IOU's transmission facilities under AB 1890, and the
California Power Exchange Corporation (the "PX"), the clearinghouse for electric
energy sales and purchases under AB 1890, were directly tied to that of the
California IOUs, the ISO suffered a substantial downgrade of its
creditworthiness and the PX ultimately filed for bankruptcy protection. In April
2001, PG&E filed for voluntary protection under Chapter 11 of the federal
Bankruptcy Code and those proceedings are ongoing. Bankruptcies involving large
and complex organizations may take several years to reach conclusion. The
potential for SCE to declare bankruptcy subsided following an October 2001
settlement reached with the CPUC that permits SCE to recover from its customers
a substantial portion of its accumulated debts.
In January 2001, California Governor Gray Davis proclaimed a state of
emergency to exist in California and ordered the California Department of Water
Resources to purchase electric power as necessary to assist in mitigating the
effects of the emergency. DWR's commitments for electric power purchases through
January 31, 2002 aggregated approximately $14 billion. DWR has announced plans
to issue approximately $12 billion of revenue bonds to fund its very substantial
power purchase program and to reimburse the State's General Fund for previous
purchases. The revenue bonds are to be repaid from a dedicated revenue stream
derived from retail end use customer payments for DWR electricity. DWR sold
$4.25 billion of the tax-exempt bonds on October 23, 2002, $6.3 billion of
tax-exempt bonds on November 5, 2002, and $700 million of taxable bonds on
November 7, 2002.
A number of lawsuits have been filed concerning various aspects of the
recent and current energy situation. In addition, state and federal authorities
are conducting investigations and other proceedings concerning various aspects
of the energy situation. These include, for example, disputes over rates set by
the CPUC, investigations by FERC and the California Senate Select Committee to
Investigate Price Manipulation of the Wholesale Energy Markets into alleged
overcharging for the sale of electricity (including sales by municipal
utilities), responsibility for electricity and natural gas purchases made by the
California IOUs and the ISO and antitrust and fraud claims against various
parties.
As a result of DWR executing numerous long-term agreements to purchase
electricity and other factors, the volatility of the cost of electricity for
California IOU customers has been reduced because smaller amounts of power are
now being purchased from the short-term market. In addition, certain
conservation measures during the height of the electricity crisis in California
were successful. However, some of the applications to build additional power
plants have been withdrawn. Many power plant developers are experiencing
financial difficulties and are reviewing the timing and economic feasibility of
building additional power plants in California. In addition, progress on new
transmission line projects
52
within California has been slow. As a result of the foregoing, no assurance can
be given that measures undertaken during the last two years, together with
measures to be taken in the future, will be sufficient to prevent similar or
other energy problems from occurring again in California.
Effect on the Water District. The Water District is supplied with
electricity and gas by a California IOU, SCE. To date, the Water District has
not experienced any significant power shortages, and there has not been any
disruption in service by the Water District. Further, the Water District
currently has sufficient self-generating resources to provide water and
wastewater services to domestic customers in the event of the occurrence of more
significant power shortages. However, power outages may cause difficulties in
receiving an adequate water supply and thus increase the cost of water.
Moreover, the operation of the Groundwater Recovery Plant will significantly
increase the Water District's electricity needs, although the DB/Operator
(during the term of the Service Contract) has guaranteed that electricity usage
and demand will not exceed certain levels and has agreed, subject to certain
limitations, to pay or credit to the Water District the cost of any usage in
excess of such level. See Appendix D--"SUMMARY OF CERTAIN PROVISIONS OF THE
SERVICE CONTRACT-- Operation and Management--Electricity Supply, Payment and
Utilization." No assurance is given that any future significant reduction or
loss of power would not materially adversely affect the operations of the Water
District.
Energy costs account for approximately 4.0% of the Water District's total
budget and are incurred to pump both groundwater and imported water supplies to
various pumping elevations located throughout the Water District. The Water
District's energy costs were $491,887.05 in Fiscal Year 2000-2001 and
$259,030.45 in Fiscal Year 2001-2002, and the Water District estimates its
energy costs will total approximately $300,000 in Fiscal Year 2002-2003. The
Water District has adopted average water rate increases for domestic and
industrial customers of approximately 1% for Fiscal Year ending June 30, 2002 to
fund increased electric energy and natural gas costs. The Water District
believes that anticipated increased energy costs will not materially adversely
affect the Water District's financial condition. However, the Water District
cannot guarantee that prices for electricity or gas will not increase more than
anticipated which could materially adversely affect the Water District's
financial condition or that additional increases in water rates or other charges
imposed by the Water District will not be proposed. Such increases in water
rates and such other charges, however, are not subject to approval by any public
agency other than the Water District or the customers of the Water District.
SECURITY OF THE SYSTEM
Military conflicts and terrorist activities may adversely impact the
operations and finances of the Water District. On September 11, 2001, terrorist
attacks occurred in New York City and Washington D.C. and resulted in
significant damage and casualties. The Water District is unable to determine the
precise effect of such events, if any, on, among other things, the Water
District's current and future budgets, revenues, available reserves and
additional safety and security expenditures.
MWD has reported that it has increased ground and air patrols of the
Colorado River Aqueduct. In addition, MWD has increased the frequency of
monitoring and testing at all treatment plants in addition to various sites
along the Colorado River Aqueduct. Although MWD has constructed redundant
systems and other safeguards, no assurance can be given that a terrorist attack
against MWD's facilities would not impair MWD's ability to deliver water to its
customers through the Colorado River Aqueduct or the State Water Project.
The Water District's system is subject to safety and security inspections
on a continuing basis as part of the Water District's normal operations and
additional security measures have recently been implemented. The Water
District's drinking water distribution system is a closed system with no open
storage facilities and water from Vail Lake is taken only when available. Water
storage reservoirs are
53
fenced, locked and equipped with intrusion alarms to notify operating personnel
if unauthorized access is attempted at a reservoir or other facility. Facilities
are patrolled by Water District staff on a regular basis to prevent intruders.
The Water District believes that these safety and security measures are adequate
to address potential threats to the system. However, the Water District does not
guarantee that such safety and security measures will be adequate in the event
that terrorist activities are directed against the system. See "--Water System
Insurance" herein. For information regarding the security plan for the Service
Contract Project Improvements, see Section 6.3 of the Independent Engineer's
Report entitled "-- Security Plan" attached hereto as Appendix G.
INVESTMENT OF WATER DISTRICT FUNDS
All funds held by the Water District are invested in accordance with the
Water District's investment policy (the "Investment Policy"). The primary
objectives of the Investment Policy, in priority, are safety of principal,
liquidity, and yield. The comprehensive Investment Policy was first adopted by
the Water District in March, 1997, last amended in May, 1997, and, as required
by California law, last approved on October 1, 2002. The Water District has
covenanted in the Installment Purchase Agreement to invest amounts held in the
Revenue Fund in certain Permitted Investments defined to mean any of the
following which at the time are legal investments under the laws of the State of
California:
(i) cash, or direct obligations of (including obligations issued or
held in book-entry form on the books of) the Department of the
Treasury of the United States of America,
(ii) obligations of any of the following federal agencies which
obligations represent the full faith and credit of the United
States of America, including the Export-Import Bank; Farm Credit
System Financial Assistance Corporation; Farmers Home
Administration; General Services Administration; United States
Maritime Administration; Small Business Administration;
Government National Mortgage Association (GNMA); United States
Department of Housing & Urban Development (PHA's); and Federal
Housing Administration;
(iii) senior debt obligations rated "AAA" by Standard & Poor's and
"Aaa" by Moody's issued by the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation and
senior debt obligations of other government sponsored agencies
approved by the Insurer;
(iv) U.S. dollar denominated deposit accounts, federal funds and
banker's acceptances with domestic commercial banks (including
the Trustee or any of its affiliates) which have a rating on
their short-term certificates of deposit on the date of purchase
of "A-l" or "A-1+" or "P-1+" by Standard & Poor's and "P-l" by
Moody's and maturing no more than 360 days after the date of
purchase. (Ratings on holding companies are not considered as the
rating of the bank);
(v) commercial paper which is rated at the time of purchase in the
single highest classification, "A-1+" by Standard & Poor's and
"P-l" by Moody's and which matures not more than 270 days after
the date of purchase;
(vi) investments in a money market fund rated "AAAm" or "AAAm-G" or
better by Standard & Poor's;
(vii) pre-refunded Municipal Obligations defined as follows: any bonds
or other obligations of any state of the United States of America
or of any agency, instrumentality or local governmental unit of
any such state which are not callable at the option of the
obligor
54
prior to maturity or as to which irrevocable instructions have
been given by the obligor to call on the date specified in the
notice; and (a) which are rated, based on an irrevocable escrow
account or fund (the "escrow"), in the highest rating category of
Standard & Poor's and Moody's or any successors thereto; or (b)
(i) which are fully secured as to principal and interest and
redemption premium, if any, by an escrow consisting only of cash
or the other obligations described in paragraph (i) above, which
escrow may be applied only to the payment of such principal of
and interest and redemption premium, if any, on such bonds or
other obligations on the maturity date or dates thereof or the
specified redemption date or dates pursuant to such irrevocable
instructions, as appropriate, and (ii) which escrow is
sufficient, as verified by a nationally recognized independent
certified public accountant, to pay principal of and interest and
redemption premium, if any, on the bonds or other obligations
described in this paragraph on the maturity date or dates
specified in the irrevocable instructions referred to above, as
appropriate;
(viii) investment agreements approved in writing by the municipal bond
insurer of the 2002 Certificates of Participation with notice to
Moody's and Standard & Poor's;
(ix) other forms of investments (including repurchase agreements)
approved in writing by the municipal bond insurer of the 2002
Certificates of Participation with notice to Moody's and Standard
& Poor's; and
(x) the State of California Local Agency Investment Fund.
All investments, including the Permitted Investments and those authorized
by law from time to time for investments by public agencies, contain a certain
degree of risk. Such risks include, but are not limited to, a lower rate of
return than expected and loss or delayed receipt of principal. See the audited
financial statements of the Water District for a description of the Water
District's investments at June 30, 2001 which are attached hereto as Appendix A.
The Water District's Investment Policy may be changed at any time by the
Board of Directors (subject to the State law provisions relating to authorized
investments) and as the California Government Code is amended. There can be no
assurance, therefore, that the State law and/or the Investment Policy will not
be amended in the future to allow for investments which are currently not
permitted under State law or the Investment Policy or that the objectives of the
Water District with respect to investments or its investment holdings at any
point in time will not change.
TAX MATTERS
In the opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California, Bond Counsel, under existing statutes,
regulations, rulings and judicial decisions, interest on the Bonds is excluded
from gross income for federal income tax purposes, and is not an item of tax
preference for purposes of calculating the federal alternative minimum tax
imposed on individuals and corporations. In the further opinion of Bond Counsel,
interest on the Bonds is exempt from State of California personal income tax.
Bond Counsel notes that, with respect to corporations, interest on the Bonds may
be included as an adjustment in the calculation of alternative minimum taxable
income which may affect the alternative minimum tax liability of corporations.
In addition, the difference between the issue price of a Bond (the first
price at which a substantial amount of the Bonds of a maturity is to be sold to
the public) and the stated redemption price at maturity with respect to the Bond
constitutes original issue discount. Original issue discount accrues under a
constant yield method, and original issue discount will accrue to a Bondowner
before receipt of cash
55
attributable to such excludable income. The amount of original issue discount
deemed received by a Bondowner will increase the Bondowner's basis in the
applicable Bond. The amount of original issue discount that accrues to the owner
of the Bond is excluded from gross income of such owner for federal income tax
purposes, is not an item of tax preference for purposes of the federal
alternative minimum tax imposed on individuals and corporations, and is exempt
from State of California personal income tax.
Bond Counsel's opinion as to the exclusion from gross income of interest
on the Bonds (and original issue discount) is based upon certain representations
of fact and certifications made by the Water District and others and is subject
to the condition that the Water District complies with all requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), that must be satisfied
subsequent to the issuance of the Bonds to assure that interest on the Bonds
(and original issue discount) will not become includable in gross income for
federal income tax purposes. Failure to comply with such requirements of the
Code might cause the interest on the Bonds (and original issue discount) to be
included in gross income for federal income tax purposes retroactive to the date
of issuance of the Bonds. The Water District has covenanted to comply with all
such requirements.
Bond Counsel's opinions may be affected by actions taken (or not taken) or
events occurring (or not occurring) after the date hereof. Bond Counsel has not
undertaken to determine, or to inform any person, whether any such actions or
events are taken or do occur. The Trust Agreement and the Tax Certificate
relating to the Bonds permit certain actions to be taken or to be omitted if a
favorable opinion of Bond Counsel is provided with respect thereto. Bond Counsel
expresses no opinion as to the exclusion from gross income of interest on the
Bonds (and original issue discount) for federal income tax purposes with respect
to any Bond if any such action is taken or omitted based upon the advice of
counsel other than Stradling Yocca Carlson & Rauth.
Although Bond Counsel has rendered an opinion that interest (and original
issue discount) on the Bonds is excluded from gross income for federal income
tax purposes provided that the Water District continues to comply with certain
requirements of the Code, the ownership of the Bonds and the accrual or receipt
of interest (and original issue discount) with respect to the Bonds may
otherwise affect the tax liability of certain persons. Bond Counsel expresses no
opinion regarding any such tax consequences. Accordingly, before purchasing any
of the Bonds, all potential purchasers should consult their tax advisors with
respect to collateral tax consequences relating to the Bonds. A copy of the
proposed form of opinion of Bond Counsel is attached hereto as Appendix F.
INDEPENDENT ACCOUNTANTS
The financial statements of the Water District for the Fiscal Years ended
June 30, 2001 and 2000, attached hereto as Appendix A to this Official Statement
have been audited by Moreland & Associates, Inc., independent auditors, as set
forth in their report, dated November 2, 2001.
RATING
Standard & Poor's has assigned a rating of "AAA" to the Bonds based upon
the issuance of the Policy by the Bond Insurer. Such rating reflects only the
views of such organization and any desired explanation of the significance of
such rating should be obtained from such rating agency, at the following
addressee: Standard & Poor's Ratings Group, 25 Broadway, New York, New York
10004. Such rating is not a recommendation to buy, sell or hold the Bonds.
Generally, a rating agency bases its rating on the information and materials
furnished to it and on investigations, studies and assumptions of its own. There
is no assurance that such rating will continue for any given period of time or
that such rating will not be revised downward or withdrawn entirely by the
rating agency, if in the judgment of such rating agency, circumstances warrant.
Any such downward revision or withdrawal of such rating may have an adverse
effect on the market price or marketability of the Bonds.
56
CERTAIN LEGAL MATTERS
The validity of the Bonds and certain other legal matters are subject to
the approving opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation, Newport Beach, California, Bond Counsel. The form of opinion Bond
Counsel proposes to render is attached as Appendix F. Certain other legal
matters will be passed upon for the Authority by Stradling Yocca Carlson &
Rauth, a Professional Corporation, Newport Beach, California; for the Water
District and the City by John R. Shaw, Esq., San Juan Capistrano, California,
City Attorney and General Counsel to the Water District, and by Hawkins,
Delafield & Wood, New York, New York, Special Counsel to the City and the Water
District; and for the Underwriter by its counsel, Orrick, Herrington & Sutcliffe
LLP.
LITIGATION
To the knowledge of their respective officers, there is no controversy of
any nature now pending or threatened against the Authority, the Water District
or the City which seeks to restrain or enjoin the sale, issuance, execution or
delivery of the Bonds or which in any way contests or affects the validity or
enforceability of the Bonds or any proceedings of the Authority, the Water
District or the City taken with respect to the issuance, delivery or sale
thereof, or the pledge or application of any moneys or security provided for the
payment of the Bonds, the use of the Bond proceeds or the existence or powers of
the Authority, the Water District or the City relating to the issuance and
delivery of the Bonds. There is no litigation pending concerning the corporate
existence of the Authority, the Water District or the City, or the title of
their officers to their respective offices, and there is no litigation pending
against the Water District which would have a material adverse effect upon the
operations of the Water District or the Revenues of the Water District.
Except as provided below, there is no controversy or litigation of any
nature now pending against either the Company or the Guarantor or, to the
knowledge of any of their respective officers, threatened, wherein an
unfavorable decision, ruling or finding is reasonably likely and would
materially adversely affect the operations or financial conditions of the
Company or the Guarantor. The Company recently received notice of a wrongful
death claim filed against it for $60 million in connection with the death of a
52-year old man, which death is alleged to be from chlorine gas exposure. The
Company denies any responsibility therefor, and the Company's insurer has
assumed responsibility for defending the claim. The Company believes that any
direct exposure it may have in respect of this claim would be immaterial to its
operations or financial condition.
UNDERWRITING
The Bonds are to be purchased by Lehman Brothers Inc., as Underwriter, at
a price which includes an underwriter's discount of $946,169.36. The Underwriter
is committed to purchase all the Bonds if any are purchased. The Underwriter may
offer and sell the Bonds to certain dealers (including depositing the Bonds into
investment trusts) and others at prices lower than the offering prices stated on
the inside cover page of this Official Statement. After the initial public
offering, the public offering prices of the Bonds may be changed from time to
time by the Underwriter.
CONTINUING DISCLOSURE
The Authority has determined that no financial or operating data
concerning the Authority is material to an evaluation of the offering of the
Bonds or to any decision to purchase, hold or sell the Bonds and the Authority
will not provide any such information. The Water District has undertaken all
responsibilities for any continuing disclosure to Bondowners as described below,
and the Authority will have no liability to the Bondowners of the Bonds or any
other person with respect to Securities and Exchange Commission Rule 15c2-12
under the Securities Exchange Act of 1934 ("Rule 15c2-12").
57
The Water District has agreed to provide, or cause to be provided, to each
nationally recognized municipal securities information repository and any public
or private repository or entity designated by the State as a state repository
for purposes of Rule 15c2-12 certain annual financial information and operating
data and, in a timely manner, notice of certain material events. For a complete
listing of items of information which will be provided in the Annual Report, see
Appendix E--"FORM OF CONTINUING DISCLOSURE AGREEMENT." Such information is to be
provided by the Water District not later than nine (9) months after the end of
the Water District's Fiscal Year (which currently would be April 1), commencing
with the report for the 2001-02 Fiscal Year. The Annual Report will be filed by
the Trustee, acting as Dissemination Agent, on behalf of the Water District with
each Nationally Recognized Municipal Securities Information Repository and with
each State Repository, if any. These covenants have been made in order to assist
the Underwriter in complying with Rule 15c2-12. The Water District has never
failed to comply in all material respects with any previous undertakings with
regard to said Rule to provide annual reports or notices of material events.
AVAILABILITY OF DOCUMENTS
Copies of the Official Statement, the Service Contract, the Trust
Agreement, the Lease Agreement, the Property Lease, the Continuing Disclosure
Agreements, the Water District's audited financial statements and additional
information relating to the Water District and the Bonds will be available, upon
written request, from the office of the Administrative Services Director, 32400
Paseo Adelanto, San Juan Capistrano, California 92675.
MISCELLANEOUS
The purpose of this Official Statement is to supply information to
prospective buyers of the Bonds. References are made herein to certain documents
and reports that are brief summaries thereof that do not purport to be complete
or definitive, and reference is made to such documents and reports for full and
complete statement of the contents thereof.
[Remainder of page intentionally left blank.]
58
Any statements in this Official Statement involving matters of opinion,
whether or not expressly so stated, are intended as such and not as
representations of fact. This Official Statement is not to be construed as a
contract or agreement between the Water District or the Authority and the
purchasers or holders of any of the Bonds. The preparation and distribution of
this Official Statement have been authorized by the Water District and the
Authority.
SAN JUAN BASIN AUTHORITY
By: /s/ John Schatz
----------------------------------
President, Board of Directors
CAPISTRANO VALLEY WATER DISTRICT
By: /s/ Diane Bathgate
----------------------------------
Chairperson, Board of Directors
59
(This Page Intentionally Left Blank)
APPENDIX A
FINANCIAL STATEMENTS OF THE WATER DISTRICT
(This Page Intentionally Left Blank)
CAPISTRANO VALLEY WATER DISTRICT
ANNUAL FINANCIAL REPORT
JUNE 30, 2001 AND 2000
(This Page Intentionally Left Blank)
CAPISTRANO VALLEY WATER DISTRICT
Annual Financial Report
June 30, 2001 and 2000
TABLE OF CONTENTS
PAGE
----
Independent Auditors' Report 1
Balance Sheets 2
Statements of Revenues, Expenses and Changes in Retained Earnings 4
Statements of Cash Flows 5
Notes to Financial Statements 6
(This Page Intentionally Left Blank)
[LETTER HEAD OF MORELAND & ASSOCIATES, INC.]
November 2, 2001
The Board of Directors of the Capistrano Valley Water District
Independent Auditors' Report
We have audited the accompanying balance sheets of the Capistrano Valley Water
District (District), a component unit of the City of San Juan Capistrano, as of
June 30, 2001 and 2000, and the related statements of revenues, expenses and
changes in retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the District's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Capistrano Valley Water
District as of June 30, 2001 and 2000, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Moreland & Associates, Inc.
1
CAPISTRANO VALLEY WATER DISTRICT
Balance Sheets
June 30, 2001 and 2000
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and investments (Note 2) $ 843,537 $ 2,794,613
Customer receivables 979,880 896,615
Property taxes receivable 7,513 9,260
Grant receivables 43,344 43,344
Other receivables 186,462 243,203
Inventory 116,842 99,695
Due from other agencies (Note 6) 97,500 97,500
Prepaid insurance 11,999
------------ ------------
Total Current Assets 2,275,078 4,196,229
------------ ------------
Restricted Assets (Note 2)
Debt Service:
Cash and investments 142,117 37,000
Cash in County Treasury 110,389 121,412
------------ ------------
Total Restricted Assets 252,506 158,412
------------ ------------
Noncurrent Assets:
Due from other agencies (Note 6) 370,411 343,533
Investment in joint venture (Note 8) 181,868 198,634
------------ ------------
Total Noncurrent Assets 552,279 542,167
------------ ------------
Utility Plant in Service (Note 3):
Land 151,732 233,651
Distribution system 33,590,640 32,387,807
Equipment 959,577
Construction in progress 3,309,690 2,460,526
------------ ------------
37,052,062 36,041,561
Less accumulated depreciation 11,713,083 11,769,992
------------ ------------
Net Utility Plant in Service 25,338,979 24,271,569
------------ ------------
Other Assets:
Capacity rights, net of accumulated amortization (Note 10) 539,982 551,034
------------ ------------
Total Assets $ 28,958,824 $ 29,719,411
============ ============
(Continued)
See Accompanying Notes to Financial Statements.
2
CAPISTRANO VALLEY WATER DISTRICT
Balance Sheets (Continued)
June 30, 2001 and 2000
2001 2000
--------------- ---------------
LIABILITIES AND FUND EQUITY
Current Liabilities Payable from Current Assets:
Accounts payable and accrued liabilities $ 547,529 $ 742,960
Due to City of San Juan Capistrano (Note 12) 172,347 172,027
Other liabilities 27,448 28,698
--------------- ---------------
Total Current Liabilities
Payable from Current Assets 747,324 943,685
--------------- ---------------
Current Liabilities Payable from Restricted Assets:
Current portion of bonds payable (Note 4) 150,000 145,000
Accrued interest payable 4,519 7,840
--------------- ---------------
Total Current Liabilities
Payable from Restricted Assets 154,519 152,840
--------------- ---------------
Total Current Liabilities 901,843 1,096,525
Long-Term Liabilities, Net of Current Portion:
General obligation bonds payable (Note 4) 45,000 195,000
--------------- ---------------
Total Liabilities 946,843 1,291,525
--------------- ---------------
Fund Equity:
Contributed capital, net (Note 11 ) 8,240,871 8,418,122
--------------- ---------------
Retained earnings (Note 7):
Reserved for debt service 97,987 5,572
Unreserved 19,673,123 20,004,192
--------------- ---------------
Total Retained Earnings 19,771,110 20,009,764
--------------- ---------------
Total Fund Equity 28,011,981 28,427,886
--------------- ---------------
Total Liabilities and Fund Equity $ 28,958,824 $ 29,719,411
=============== ===============
3
CAPISTRANO VALLEY WATER DISTRICT
Statements of Revenues, Expenses and Changes in Retained Earnings
For the Years Ended June 30, 2001 and 2000
2001 2000
------------ ------------
Operating Revenues:
Water sales $ 4,838,737 5,313,543
Customer service charges 981,966 945,686
Development service charges 61,068 40,945
Sewer collection fees 102,359 101,017
Other 8,097 321,444
------------ ------------
Total Operating Revenues 5,992,227 6,722,635
------------ ------------
Operating Expenses:
Water purchase and production 3,617,196 3,944,555
Water operations and maintenance 3,402,729 2,590,719
General and administrative 381,900 353,967
Depreciation (Note 3) 804,941 824,969
Amortization 11,054 11,053
Other expense 11,165 10,767
------------ ------------
Total Operating Expenses 8,228,985 7,736,030
------------ ------------
Operating Loss (2,236,758) (1,013,395)
------------ ------------
Non Operating Revenues (Expenses):
Investment income 196,588 219,376
Capital improvement fees 998,423 1,223,111
Property taxes 663,845 670,813
Grant revenues 993
Gain on sale of property 86,581 58,288
Interest expense (Note 4) (10,092) (18,523)
Loss on investment in joint venture (Note 8) (16,766) (10,466)
------------ ------------
Total Nonoperating Revenues 1,918,579 2,143,592
------------ ------------
Net Income (Loss) (318,179) 1,130,197
Depreciation on Contributed Assets (Note 11) 177,252 178,825
------------ ------------
Increase (Decrease) in Retained Earnings (140,927) 1,309,022
Retained Earnings, Beginning of Period 20,009,764 18,700,742
Residual Equity Transfer (97,727)
------------ ------------
Retained Earnings, End of Period $ 19,771,110 $ 20,009,764
============ ============
See Accompanying Notes to Financial Statements.
4
CAPISTRANO VALLEY WATER DISTRICT
Statements of Cash Flows
Years Ended June 30, 2001 and 2000
2001 2000
------------ ------------
Cash Flows from Operating Activities:
Operating loss $ (2,236,758) $ (1,013,395)
Adjustments to reconcile operating loss to net cash
provided (used) by operating activities:
Depreciation and amortization 815,995 836,022
(Increase) decrease customer receivables (83,265) (91,289)
(Increase) decrease other receivables 58,488 (134,296)
(Increase) decrease inventory (17,147) (9,198)
(Increase) decrease other assets 11,999 (6,699)
(Increase) decrease due from other agencies (26,878) 125,953
Increase (decrease) in deferred revenues (213,214)
Increase (decrease) accounts
payable and accrued liabilities (195,431) 240,609
Increase (decrease) other liabilities (1,250) 6,100
------------ ------------
Net Cash Provided (Used) by Operating Activities (1,674,247) (259,407)
------------ ------------
Cash Flows from Noncapital and Related Financing Activities:
Increase in amounts due to City of San Juan Capistrano
(Note 12) 320 5,188
Property taxes 665,590 670,813
Grant revenues 993
------------ ------------
Net Cash Provided by Noncapital
and Related Financing Activities 665,910 676,994
------------ ------------
Cash Flows from Capital and Related Financing Activities:
Interest and fiscal agent payments on long-term borrowings (13,413) (22,482)
Principal payments on long-term borrowing (145,000) (183,000)
Acquisition of property, plant and equipment (2,051,997) (1,719,473)
Proceeds from sale of property 166,754 58,288
Capital improvement fees 998,423 1,223,111
------------ ------------
Net Cash (Used) by Capital
and Related Financing Activities (1,045,233) (643,556)
------------ ------------
Cash Flows from Investing Activities:
Interest payments received 196,588 219,376
------------ ------------
Net (Decrease) in
Cash and Cash Equivalents (1,856,982) (6,593)
Cash and Cash Equivalents, July 1 2,953,025 2,959,618
------------ ------------
Cash and Cash Equivalents, June 30 $ 1,096,043 $ 2,953,025
============ ============
The District had a noncash loss from an investment in the San Juan Basin
Authority joint venture in an amount of $16,766 and $10,466 in the years ended
June 30, 2001 and June 30, 2000, respectively, primarily due to depreciation.
Equipment with a net book value of $97,727 was transferred to the City of San
Juan Capistrano.
See Accompanying Notes to Financial Statements.
5
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements
June 30, 2001 and 2000
1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES:
a. Reporting Entity:
The Capistrano Valley Water District (the District) was formerly
known as the Orange County Waterworks District No. 4 which was
formed to serve the San Juan Capistrano area in 1930. The District
was governed by the Orange County Board of Supervisors until 1970,
when the District became a subsidiary district of the City of San
Juan Capistrano. In July 1997, the District's operations were merged
with the City of San Juan Capistrano. The employees of the District
were transferred to the City and all services are provided to the
District through a contractual agreement. The District still
operates under the provisions of the California Water Code by which
it was formed, but is now governed by a Board of Directors comprised
of the five-member San Juan Capistrano City Council. The District
also has a five-member Advisory Commission which makes
recommendations to the Board of Directors on items such as the
District's Budget. For financial reporting purposes, the District is
included as a component unit of the City of San Juan Capistrano.
The District provides water service for the City of San Juan
Capistrano. Water is provided for residential, commercial,
industrial, and agricultural uses, and also for fire fighting
purposes.
b. Basis of Accounting:
The District operates and reports as an enterprise fund utilizing
the accrual method of accounting. Revenues are recognized when
earned and expenses are recognized when incurred.
c. Investments:
Effective July 1, 1997, the District adopted the provisions of
Governmental Accounting Standards Board (GASB) Statement No. 31,
"Accounting and Financial Reporting for Certain Investments and
External Pools," which require governmental entities to report
certain investments at fair value (quoted market price or the best
available estimate thereof) in the balance sheet and recognize the
corresponding change in the fair value of investments in the year in
which the change occurred. In accordance with GASB Statement No. 31,
the District has stated investments at fair value.
d. Cash Equivalents:
For purposes of the statement of cash flows, the District considers
all highly liquid investments (including restricted assets) to be
cash equivalents.
6
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
e. Customer Receivables:
The allowance for doubtful accounts is based upon collection
experience with the customers. There were no allowances for doubtful
accounts required at June 30, 2001 and June 30, 2000. Charges to bad
debt expense were $8,277 and $8,542 for the years ended June 30,
2001 and June 30, 2000, respectively.
f. Inventory:
Inventory, which consists principally of water meters and spare
parts, is stated at the lower of cost or market.
g. Utility Plant in Service and Depreciation:
Property, plant and equipment are stated at cost. Cost includes
materials, direct labor, and such indirect items as engineering and
supervision, employee fringe benefits and interest during
construction on borrowed funds related to plant under construction.
Contributed facilities are recorded at the estimated cost of
construction and/or the face amount of construction bonding secured
by the developers.
Depreciation is recorded on the straight-line basis over the
estimated useful lives of the related assets, which range from 3-60
years.
h. Contributed Capital:
Contributed capital is recorded for assets donated to the District
funded by developers or governmental grants received for capital
outlay in accordance with GASB Statement No. 33, effective July 1,
2000. Depreciation is charged to operations and later reclassified
to contributed capital.
i. Grant Accounting:
Grants receivable and revenue are recorded when they are earned.
This occurs after the District has incurred an expense reimbursable
through a grant. Accordingly, when the District receives money in
advance of grant expenses it records deferred grant revenue.
j. Property Tax Calendar:
Property taxes are levied by the County of Orange on assessed
valuations each January 1 and become a lien on the property assessed
on that date. Taxes on the secured rolls are payable in two
installments each November 1 and March 1 and become delinquent on
December 10 and April 10, respectively. Taxes on unsecured property
are assessed
7
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
taxes are collected by the County of Orange Tax Collector and are
apportioned to participating agencies in accordance with a
prearranged schedule of apportionments.
k. Insurance:
The District insurance coverage is provided in conjunction with the
City of San Juan Capistrano. Information related to the insurance
program can be found in the notes to the general purpose financial
statements of the City of San Juan Capistrano.
l. Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
2. CASH AND INVESTMENTS
Cash and investments at June 30, 2001 and 2000 are reported in the
accompanying balance sheet as follows:
June 30, 2001 June 30, 2000
------------- -------------
Cash and investments $ 843,537 $ 2,794,613
Restricted Assets:
Debt service -
Cash and investments 142,117 37,000
Cash in County Treasury 110,389 121,412
------------- -------------
Total $ 1,096,043 $ 2,953,025
============= =============
Authorized Investments:
Under provisions of the District's Investment Policy, and in accordance
with Section 53601 of the California Government Code, the District may
invest in the following types of investments:
Securities of the U.S. Government, or its agencies
California Local Agency Investment Fund demand deposits (LAIF)
Repurchase Agreements up to a one year term with certain collateral
requirements
Taxable or tax-exempt warrants, notes, bonds or similar evidences of
indebtedness of the State of California
Classification of Deposits and Investments By Credit Risk:
8
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
Classification of Deposits and Investments By Credit Risk:
Deposits and investments are classified into three categories of credit
risk. These categories are as follows:
Deposits:
Category 1 - Deposits which are insured by the Federal Deposit Insurance
Corporation (FDIC).
Category 2 - Deposits which are collateralized. The California Government
Code requires California banks and savings and loan
associations to secure the District's deposits by pledging
government securities with a value of 110% of the District's
deposits. California law also allows financial institutions
to secure District deposits by pledging first deed mortgage
notes having a value of 150% of the District's total
deposits. The District Treasurer may waive the collateral
requirement for deposits which are fully insured up to
$100,000 by the FDIC. The collateral for deposits in federal
and state chartered banks is held in safekeeping by an
authorized Agent of Depository recognized by the State of
California Department of Banking. The collateral for deposits
with savings and loan associations is generally held in
safekeeping by the Federal Home Loan Bank in San Francisco,
California as a third-party trustee. These securities are
physically held in an undivided pool for all California
public agency depositors. Under government Code Section
53655, the placement of securities by a bank or savings and
loan association with an "Agent of Depository" has the effect
of perfecting the security interest in the name of the local
government agency. Accordingly, all collateral held by
California Agents of Depository are considered to be held
for, and in the name of, the local governmental agency.
Category 3 - Deposits which are uninsured or uncollateralized.
Investments:
Category 1 - Investments which are insured by the Securities Investors
Protection Corporation (SIPC), or investments which are held
in definitive (i.e. physical) form by the District or the
District's agent in the District's name, or investments
acquired through the federal reserve book-entry system where
the financial institution or broker/dealer associated with
the purchases is separated from the custodial safekeeping
agent on the same investments and where the investments are
recorded on the books and records of the financial
institution or broker/dealer in the name of the District.
9
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
Category 2 - Investments which are uninsured, 1) where the investments are
acquired through a financial institution's investment or
trading department, but are held in the same financial
institution's trust department and are recorded in the
District's name in the trust department's systems and
records.
Category 3 - Investments which are uninsured, 1) where the investments are
acquired through a financial institution's investment
department but are held for custodial purposes in the same
financial institution's safekeeping department, or 2) where
the investments are acquired through a financial
institution's trust department, and held for custodial
safekeeping by the same trust department, or 3) where
investments are not held in the District's name in the
systems are records of the financial institution.
The District had $985,654 of cash and investments pooled with the City of
San Juan Capistrano's cash and investments. The information required by
Governmental Accounting Standards Board Statement No. 3 for the pooled
cash and investments is available in the City of San Juan Capistrano's
financial statements.
The District's cash of $110,389 held by the Orange County Treasurer is
not required to be categorized.
3. CHANGES IN UTILITY PLANT IN SERVICE:
A summary of the changes in property, plant and equipment for the years
ended June 30, 2001 follows:
Balance Balance
July 1, 2000 Additions Deletions June 30, 2001
-------------- ------------- ------------- -------------
Land $ 233,651 $ (81,919) $ 151,732
Distribution system 32,387,807 $ 1,202,833 33,590,640
Equipment 959,577 (959,577)
Construction in progress 2,460,526 2,051,998 (1,202,834) 3,309,690
-------------- ------------- ------------- -------------
36,041,561 3,254,831 (2,244,330) 37,052,062
Less Accumulated Depreciation (11,769,992) (804,941) 861,850 (11,713,083)
-------------- ------------- ------------- -------------
Net Property, Plant and
Equipment $ 24,271,569 $ 2,449,890 $ 1,382,480 $ 25,338,979
============= ============= ============= =============
10
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
4. BONDS PAYABLE:
Bonds payable at June 30, 2001 and 2000 consisted of the following:
2001 2000
----------- ----------
1961 General Obligation Bonds
The District issued $2,800,000 of general obligation bonds on October 1,
1961, with interest rates ranging from 4.50% to 5%. Bond principal
payments of $10,000 to $130,000 are due on July 1 of each year from 1963
through 2001. Interest is payable semi-annually on January 1 and July 1. $ 105,000 $ 210,000
1972 General Obligation Bonds
The District issued $700,000 of general obligation bonds on
August 1, 1972, with interest rates ranging from 5.60% to
7%. Bond principal payments of $5,000 to $45,000 are due
on August 1 of each year from 1973 through 2002. Interest
is payable semi-annually on February 1 and August 1. 90,000 130,000
----------- ----------
Total Bonds Payable 195,000 340,000
Less Current Portion 150,000 145,000
----------- ----------
Long-Term Bonds Payable $ 45,000 $ 195,000
=========== ==========
The future debt service payments on long-term debt are as follows:
Year Ending
June 30, Principal Interest Total
----------- ----------- ----------- -----------
2002 $ 150,000 $ 6,244 $ 156,244
2003 45,000 1,294 46,294
----------- ----------- -----------
$ 195,000 $ 7,538 $ 202,538
=========== =========== ===========
5. ORANGE COUNTY EMPLOYEES' RETIREMENT SYSTEM:
Effective July 1, 1997, employees of the District were transferred to the
City of San Juan Capistrano. All District employees eligible to
participate in the Orange County Retirement Plan prior to July 1, 1997 are
eligible to participate in the City of San Juan Capistrano's retirement
plan with the Orange County Employees Retirement System (OCERS).
Additional information on OCERS can be obtained from the City of San Juan
Capistrano's financial statements.
11
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
6. DUE FROM OTHER AGENCIES:
The District has entered into a Cooperation Agreement with the City of San
Juan Capistrano Redevelopment Agency (the "Agency") whereby the District
has deferred receipt of site development fees from developers in the
redevelopment project area and has requested that developers pay the
Agency those fees. The deferred fees plus accrued interest will be repaid
to the District beginning July 1, 1994 at the rate of $97,500 a year
(principal) for 10 years. At the end of that period a balloon payment will
be due for the balance. The interest rate is to be adjusted annually based
on the District's rate of return on invested funds during the previous
year. The receivable at June 30, 2001 of $467,911 includes $134,419 of
accrued interest.
7. RESERVES OF RETAINED EARNINGS:
In accordance with the covenants and requirements of the District's
long-term debt agreements, a portion of retained earnings has been
reserved for future repayment of principal and interest. The reserve at
June 30, 2001 and 2000 was calculated as follows:
2001 2000
----------- -----------
Restricted assets - debt service $ 252,506 $ 158,412
Less current liabilities payable from
restricted assets - debt service 154,519 152,840
----------- -----------
Reserved for debt service $ 97,987 $ 5,572
=========== ===========
8. INVESTMENT IN SAN JUAN BASIN AUTHORITY:
On November 22, 1972, the Capistrano Valley Water District, the Capistrano
Beach County Water District and the Santa Margarita Water District
established the San Juan Basin Authority (the Authority), a separate legal
entity, whose function is to plan, acquire, construct, maintain, repair,
operate, and control facilities to supply the inhabitants and lands within
each of the member agencies boundaries with water and provide for the
development and conservation of water supplies. The Moulton Niguel Water
District was subsequently admitted as a member in September 1987. In 1989,
the Capistrano Beach County Water District withdrew from the Authority and
the Trabuco Canyon Water District was subsequently admitted as a member.
The Authority's governing board consists of one member from each District.
The District's ownership percentage in the joint venture varies by fund
and project. For the general fund, the District has a twenty-five percent
ownership, and of the five Authority projects, the District has a fifty
percent ownership in two projects and a twenty-five percent ownership in
two projects, and no interest in the other project.
12
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
The District paid the Authority $65,234 and $46,553 for operations and
maintenance for the years ended June 30, 2001 and 2000, respectively.
The District's investment in the Authority has been recorded utilizing the
equity method of accounting.
Audited financial information of the Authority is available at the
District's administrative office.
9. COMMITMENTS AND CONTINGENCIES:
When it is probable that claim liability has been incurred at year-end,
and the amount of the loss can be reasonably estimated, the District
records the estimated loss, net of any insurance coverage. At
June 30, 2001 in the opinion of the Districts management there were no
material unrecorded claims.
Under the terms of the District's grants from the Federal Emergency
Management Agency (FEMA), final inspections and audits by the State of
California Office of Emergency Services (OES) are required prior to final
approval and release of funds. The final determination of the amounts to
be reimbursed will be based upon these inspections and audits, therefore
actual amounts received could differ from the recorded amounts. District
management believes that disallowances, if any, would be immaterial.
10. CAPACITY RIGHTS:
Lease of Capacity Rights in Allen-McColloch Pipeline:
On October 22, 1992, the District entered into an interim license and
lease of capacity agreement with the Municipal Water District of Orange
County (MWDOC) to lease capacity rights for delivery of water.
In fiscal year 1995, the District negotiated a payment plan with MWDOC to
complete the purchase of rights to 4.9 CFS capacity, and as of June
30, 2001, the District has paid a total of $456,126. The District is
amortizing the capacity rights over 60 years. At June 30, 2001 the
remaining unamortized capacity rights amounted to $357,109.
South County Pipeline:
During 1993, the District entered into the South County Pipeline Service
Connection Agreement (agreement) with Santa Margarita Water District,
which provides a service connection and rights to capacity in the South
County Pipeline. As part of the agreement, the District agreed to pay a
share of the costs of constructing a Regulating Reservoir and
13
CAPISTRANO VALLEY WATER DISTRICT
Notes to Financial Statements (Continued)
June 30, 2001 and 2000
other required capital improvements. The District's share of the costs
totaled $207,025, which did not result in any ownership rights in the
underlying asset. The total amount has been capitalized as capacity rights
on the accompanying balance sheet, and is to be amortized over the
estimated useful life of the improvements. The District is amortizing the
capacity rights over a period of 60 years. At June 30, 2001, the remaining
unamortized capacity rights amounted to $182,873.
11. CONTRIBUTED CAPITAL:
Changes in contributed capital were as follows:
For the For the
Year Ended Year Ended
June 30, 2001 June 30, 2000
------------- -------------
Balance - Beginning of Year $ 8,418,122 $ 8,596,947
Depreciation on contributed assets (177,252) (178,825)
------------- -------------
$ 8,240,870 $ 8,418,122
Balance - End of Year ============= =============
12. DUE TO CITY OF SAN JUAN CAPISTRANO:
The District collects sewer charges on behalf of the City of San Juan
Capistrano. The sewer charges collected but not paid to the City amounted
to $172,347 and $172,027 at June 30, 2001 and June 30, 2000, respectively.
14
APPENDIX B
BOOK-ENTRY-ONLY SYSTEM
The following information has been provided by DTC for use in securities
offering documents, and neither the Authority nor the Water District takes any
responsibility for the accuracy or completeness thereof. Neither the Authority
nor the Water District can give any assurances that DTC, DTC Participants or
Indirect Participants will distribute to the Beneficial Owners either (a)
payments of interest, principal or premium, if any, with respect to the Bonds or
(b) certificates representing ownership interest in or other confirmation of
ownership interest in the Bonds, or that they will so do on a timely basis or
that DTC, DTC Participants or DTC Indirect Participants will act in the manner
described in this Official Statement. The current "Rules" applicable to DTC are
on file with the Securities and Exchange Commission and the current "Procedures"
of DTC to be followed in dealing with DTC Participants are on file with DTC.
The Depository Trust Company ("DTC"), New York, NY, will act as securities
depository for the Bonds. The Bonds will be issued as fully-registered
securities registered in the name of Cede & Co. (DTC's partnership nominee) or
such other name as may be requested by an authorized representative of DTC. One
fully-registered Bond certificate will be issued for each maturity of the Bonds,
each in the aggregate principal amount of such maturity, and will be deposited
with DTC.
DTC, the world's largest depository, is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934. DTC holds and provides asset
servicing for over 2 million issues of U.S. and non-U.S. equity issues,
corporate and municipal debt issues, and money market instruments from over 85
countries that DTC's participants ("Direct Participants") deposit with DTC. DTC
also facilitates the post-trade settlement among Direct Participants of sales
and other securities transactions in deposited securities, through electronic
computerized book-entry transfers and pledges between Direct Participants'
accounts. This eliminates the need for physical movement of securities
certificates. Direct Participants include both U.S. and non-U.S. securities
brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations. DTC is a wholly owned subsidiary of The Depository Trust &
Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct
Participants of DTC and Members of the National Securities Clearing Corporation,
Government Securities Clearing Corporation, MBS Clearing Corporation, and
Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also
subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the
American Stock Exchange LLC, and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to others such as both U.S. and
non-U.S. securities brokers and dealers, banks, trust companies, and clearing
corporations that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants"). DTC
has Standard & Poor's highest rating: AAA. The DTC Rules applicable to its
Participants are on file with the Securities and Exchange Commission. More
information about DTC can be found at www.dtcc.com.
Purchases of Bonds under the DTC system must be made by or through Direct
Participants, which will receive a credit for the Bonds on DTC's records. The
ownership interest of each actual purchaser of each Bond ("Beneficial Owner") is
in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchase. Beneficial Owners are, however, expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the Direct or Indirect Participant
B-l
through which the Beneficial Owner entered into the transaction. Transfers of
ownership interests in the Bonds are to be accomplished by entries made on the
books of Direct and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Bonds, except in the event that use of the book-entry system for
the Bonds is discontinued.
To facilitate subsequent transfers, all Bonds deposited by Direct
Participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co., or such other name as may be requested by an authorized
representative of DTC. The deposit of Bonds with DTC and their registration in
the name of Cede & Co. or such other DTC nominee do not effect any change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the Bonds; DTC's records reflect only the identity of the Direct Participants to
whose accounts such Bonds are credited, which may or may not be the Beneficial
Owners. The Direct and Indirect Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. Beneficial Owners of Bonds may wish to take
certain steps to augment the transmission to them of notices of significant
events with respect to the Bonds, such as redemptions, tenders, defaults, and
proposed amendments to the Bond documents. For example, Beneficial Owners of
Bonds may wish to ascertain that the nominee holding the Bonds for their benefit
has agreed to obtain and transmit notices to Beneficial Owners. In the
alternative, Beneficial Owners may wish to provide their names and addresses to
the registrar and request that copies of notices be provided directly to them.
Redemption notices shall be sent to DTC. If less than all of the Bonds
within an issue are being redeemed, DTC's practice is to determine by lot the
amount of the interest of each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or
vote with respect to Bonds unless authorized by a Direct Participant in
accordance with DTC's Procedures. Under its usual procedures, DTC mails an
Omnibus Proxy to the Authority as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts Bonds are credited on the record date (identified
in a listing attached to the Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the Bonds
will be made to Cede & Co., or such other nominee as may be requested by an
authorized representative of DTC. DTC's practice is to credit Direct
Participants' accounts upon DTC's receipt of funds and corresponding detail
information from the Authority or the Trustee, on payable date in accordance
with their respective holdings shown on DTC's records. Payments by Participants
to Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers in
bearer form or registered in "street name," and will be the responsibility of
such Participant and not of DTC nor its nominee, the Trustee, the Water District
or the Authority, subject to any statutory or regulatory requirements as may be
in effect from time to time. Payment of redemption proceeds, distributions, and
dividend payments to Cede & Co. (or such other nominee as may be requested by an
authorized representative of DTC) is the responsibility of the Authority or the
Trustee, disbursement of such payments to Direct Participants will be the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners will be the responsibility of Direct and Indirect Participants.
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DTC may discontinue providing its services as depository with respect to
the Bonds at any time by giving reasonable notice to the Authority or the
Trustee. Under such circumstances, in the event that a successor depository is
not obtained, Bond certificates are required to be printed and delivered.
The Authority may decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository). In that event,
Bond certificates will be printed and delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Authority and the Water District believe
to be reliable, but neither the Authority nor the Water District takes any
responsibility for the accuracy thereof.
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APPENDIX C
DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF
PRINCIPAL FINANCING DOCUMENTS
The following is a brief summary of certain provisions of the legal
documents related to the Bonds which are not described in the Official Statement
to which this Appendix is attached. This summary is not intended to be
definitive and is qualified in its entirety by reference to the Lease and the
Trust Agreement for the complete terms thereof. Copies of the Lease and the
Trust Agreement are available upon request from the Authority.
DEFINITIONS
The following are summaries of definitions of certain terms used in this
Summary of Principal Financing Documents. All capitalized terms not defined
herein or elsewhere in the Official Statement have the meanings set forth in the
Lease or the Trust Agreement.
"Acceptance" means acceptance of the Service Contract Project Improvements
by the Water District pursuant to the terms of the Service Contract.
"Additional Payments" means any amounts payable by the Water District
under the terms of the Lease Agreement, other than the Lease Payments.
"Alternative Facilities" shall mean any new water storage and production
facilities that would in aggregate supply more than 3.0 MGD of potable water.
Alternative Facilities shall not include any wells existing on the Closing Date,
any facilities for the importation or transmission of local water sources
delivered by wholesale water agencies to the Water District, or other
generation, storage and production sources developed by the District in the
course of its ongoing program to develop local water supply infrastructure,
including without limitation for reclaimed water, prior to an event of default
under the Service Contract and not in view of a Lease Termination.
"Alternative Reserve Account Security" means one or more letters of
credit, surety bonds or bond insurance policies, for the benefit of the Trustee
in substitution for or in place of all or any portion of the Reserve
Requirement.
"Annual Debt Service" means, for each Bond Year, the sum of (a) the
interest payable on the Outstanding Bonds in such Bond Year, assuming that any
Outstanding term Bonds are redeemed from mandatory sinking fund payments as
scheduled and (b) the principal amount of the Outstanding Bonds scheduled to be
paid or redeemed in such Bond Year.
"Authority" means the San Juan Basin Authority, a joint exercise of powers
authority organized and existing pursuant to Chapter 5, Division 7, Title 1 of
the Government Code of the State.
"Authorized Representative of the Authority" means the Chairman or
Executive Director of the Authority and any person or persons designated by the
Chairman or Executive Director of the Authority and authorized to act on behalf
of the Authority as certified by a written certificate signed
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on behalf of the Authority by the Chairman or Executive Director of the
Authority and containing the specimen signature of each such person.
"Authorized Representative of the City" means the City Manager of the
City, the Public Works Director of the City or any person or persons designated
by the City Manager and authorized to act on behalf of the City by a written
certificate signed on behalf of the City by the City Manager and containing the
specimen signature of each such person.
"Authorized Representative of the Water District" means the General
Manager of the Water District or Administrative Services Director of the Water
District, City Public Works Director or any person or persons designated by the
General Manager and authorized to act on behalf of the Water District by a
written certificate signed on behalf of the Water District by the General
Manager and containing the specimen signature of each such person.
"Average Annual Debt Service" means the amount determined by dividing the
sum of all Annual Debt Service amounts due in each of the Bond Years following
the date of such calculation by the number of such Bond Years.
"Board of Directors" means the Board of Directors of the Water District.
"Bond" or "Bonds" means any of the San Juan Basin Authority, Lease Revenue
Bonds (Ground Water Recovery Project), Issue of 2002 issued pursuant to the
Trust Agreement.
"Bond Counsel" means a firm of nationally-recognized firm of attorneys
experienced in the issuance of tax-exempt obligations the interest on which is
excludable from gross income under Section 103 of the Code.
"Bond Insurer" means Ambac Assurance Corporation, a Wisconsin stock
insurance corporation or any successor thereto.
"Bondowner" or "Owner of Bonds" or "Owner" means the registered owner of
any Bond or Bonds.
"Bond Purchase Agreement" means the Bond Purchase Agreement by and among
the Authority, the Water District and Lehman Brothers relating to the sale of
the Bonds.
"Bond Year" means the twelve month period which commences on November 2 in
every year and ends on November 1 of the succeeding year. The first Bond Year
shall commence on the Delivery Date and end on November 1, 2003.
"Business Day" means any day other than (i) a Saturday or Sunday or legal
holiday or a day on which banking institutions in the city in which the
principal office of the Trustee is located are authorized to close or (ii) a day
on which the New York Stock Exchange is closed.
"Certificate of Authorized Representative of the Authority" means a
certificate executed by an Authorized Representative of the Authority.
"Certificate of Authorized Representative of the Water District" means a
certificate executed by an Authorized Representative of the Water District.
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"City" means the City of San Juan Capistrano, California.
"Closing Date" means the date on which the Bonds are delivered to the
initial purchaser thereof.
"Code" means the Internal Revenue Code of 1986, as amended and the United
States Treasury Regulations proposed or in effect with respect thereto.
"Company" means ECO Resources, Inc., a Texas corporation, and any
successor thereto under the terms of the Service Contract.
"Costs of Issuance" means all expenses and costs of the Authority or the
Water District incident to the performance of its obligations in connection with
the authorization, execution, sale and delivery of the Bonds, including, but not
limited to, printing costs, initial Trustee fees and expenses and fees and
expenses of its counsel, fees and expenses of consultants and fees and expenses
of bond counsel to the Authority or the Water District, credit enhancement fees
and bond insurance costs.
"Costs of Issuance Account" means the account by that name established
pursuant to the Trust Agreement.
"CPI" means Consumer Price Index, as published by U.S. Department of
Commerce, Bureau of Economic Analysis.
"DTC" means The Depository Trust Company, New York, New York, and its
successors and assigns.
"Debt Service Payment Account" means the Debt Service Payment Account
established in the Trust Agreement.
"Delivery Date" means the date of the initial issuance of the Bonds.
"Depository" means (a) initially, DTC, and (b) any other securities
depository acting as Depository pursuant to the Trust Agreement.
"End of Term" shall have the meaning ascribed thereto in the Lease.
"Events of Default" means events of default as set forth in the Lease.
"Fiscal Year" means the twelve month fiscal period of the Water District
which commences on July 1 in every year and ends on June 30 of the succeeding
year.
"GAAP" means generally accepted accounting principles.
"Independent Counsel" means an attorney duly admitted to the practice of
law before the highest court of the state in which such attorney maintains an
office and who is not an employee or officer of the Authority, the Trustee or
the Water District.
"Independent Engineer" means the engineer so designated from time to time
pursuant to the terms of the Service Contract.
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"Insurance Policy" means the financial guaranty insurance policy issued by
the Bond Insurer insuring the payment when due of the principal of and interest
on the Bonds as provided therein.
"Interest Payment Date" means June 1 and December 1 of each year
commencing June 1, 2003.
"Investment Securities" means and includes any of the following
securities, if and to the extent the same are at the time legal for investment
of Authority funds (the Trustee is entitled to rely upon investment direction of
the Water District as a determination that such investment is a legal
investment):
A. For all purposes including defeasance investments.
(1) Cash (insured at all times by the Federal Deposit Insurance
Corporation),
(2) Direct obligations of (including obligations issued or held in
book entry form on the books of the Department of the Treasury of the United
States of America, or
(3) Senior debt obligations of other Government Sponsored Agencies
approved by the Bond Insurer.
B. For all purposes other than defeasance investments in refunding
escrow accounts.
(1) Obligations of any of the following federal agencies which
obligations represent the full faith and credit of the United States of America,
including:
.Export-Import Bank
.Rural Economic Community Development Administration
.U.S. Maritime Administration
.Small Business Administration
.U.S. Department of Housing & Urban Development (PHAs)
.Federal Housing Administration
.Federal Financing Bank
(2) Direct obligations of any of the following federal agencies
which obligations are not fully guaranteed by the full faith and credit of the
United States of America:
.Senior debt obligations issued by the Federal
National Mortgage Association (FNMA) or Federal Home
Loan Mortgage Corporation (FHLMC).
.Obligations of the Resolution Funding Corporation (REFCORP)
.Senior debt obligations of the Federal Home Loan Bank System
.Senior debt obligations of other Government Sponsored
Agencies approved by the Bond Insurer
(3) U.S. dollar denominated deposit accounts, federal funds and
bankers' acceptances with domestic commercial banks which have a rating on their
short term certificates of deposit on the date of purchase of "P-l" by Moody's
and "A-l" or "A-1+" by S&P and maturing not
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more than 360 calendar days after the date of purchase. (Ratings on holding
companies are not considered as the rating of the bank);
(4) Commercial paper which is rated at the time of purchase in the
single highest classification, "P-l" by Moody's and "A-1+" by S&P and which
matures not more than 270 calendar days after the date of purchase;
(5) Investments in a money market fund rated "AAAm" or "AAAm-G" or
better by S&P including funds for which the Trustee or an affiliate provides
investment advice or other services;
(6) Pre-refunded Municipal Obligations defined as follows: any
bonds or other obligations of any state of the United States of America or of
any agency, instrumentality or local governmental unit of any such state which
are not callable at the option of the obligor prior to maturity or as to which
irrevocable instructions have been given by the obligor to call on the date
specified in the notice; and
(A) which are rated, based on an irrevocable escrow account
or fund (the "escrow"), in the highest rating category of Moody's or S&P or any
successors thereto; or
(B) (i) which are fully secured as to principal and interest
and redemption premium, if any, by an escrow consisting only of cash or
obligations described in paragraph A(2) above, which escrow may be applied only
to the payment of such principal of and interest and redemption premium, if any,
on such bonds or other obligations on the maturity date or dates thereof or the
specified redemption date or dates pursuant to such irrevocable instructions, as
appropriate, and (ii) which escrow is sufficient, as verified by a nationally
recognized independent certified public accountant, to pay principal of and
interest and redemption premium, if any, on the bonds or other obligations
described in this paragraph on the maturity date or dates specified in the
irrevocable instructions referred to above, as appropriate;
(7) Municipal obligations rated "Aaa/AAA" or general obligations
of States with a rating of "A2/A" or higher by both Moody's and S&P.
(8) Investment agreements approved in writing by the Bond Insurer
(supported by appropriate opinions of counsel); and
(9) Other forms of investments (including repurchase agreements)
approved in writing by the Bond Insurer.
C. The value of the above investments shall be determined as follows:
(a) For the purpose of determining the amount in any fund, all
Permitted Investments credited to such fund shall be valued at fair market
value. The Trustee shall determine the fair market value based on accepted
industry standards and from accepted industry providers. Accepted industry
providers shall include but are not limited to pricing services provided by
Financial Times Interactive Data Corporation, Merrill Lynch, Salomon Smith
Barney, Bear Stearns, or Lehman Brothers.
(b) As to certificates of deposit and bankers' acceptances: the
face amount thereof, plus, accrued interest thereon; and
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(c) As to any investment not specified above: the value thereof
established by prior agreement among the Authority, the Trustee, and the Bond
Insurer.
"Joint Exercise of Powers Agreement" means that certain Joint Exercise of
Powers Agreement entered into by and among the Capistrano Beach County Water
District, the Santa Margarita Water District, and Orange County Water District
No. 4 dated as of November 22, 1971, as amended effective September 1, 1987 by
Addendum No. 1 to the Joint Exercise of Powers Agreement and Addendum No. 3
dated as of September 1, 2002.
"Lease" or "Lease Agreement" means the Lease Agreement, between the Water
District and the Authority, as amended and supplemented from time to time in
accordance with its terms.
"Lease Payment" means the amount to be paid by the Water District for the
lease of the Project corresponding to the Lease Payment Date set forth in the
Lease.
"Lease Payment Date" means the 15th day of the month preceding each
Interest Payment Date (or if the 15th day of the month is not a Business Day, on
the next succeeding Business Day).
"Lease Revenue Bonds Rate Stabilization Reserve" means the fund by that
name established pursuant to the Lease.
"Lease Term" means the period during which the Lease Agreement is in
effect as specified in the Lease Agreement.
"Lease Termination" means any Termination of the Lease pursuant to the
terms of the Lease controlling termination upon the occurrence of an event of
default under the Service Contract.
"Letter of Credit" means the Service Contract Letter of Credit (as defined
in the Service Contract).
"Letter of Credit Provider" means, initially, Bank of America, N.A.
"Lock-out Period" shall mean a three-year period from the date of a
Termination Event.
"Maintenance and Operation Costs" means costs spent or incurred for
operation and maintenance of the Water System calculated in accordance with
generally accepted accounting principles, including (among other things) the
reasonable expenses of management and repair and other expenses necessary to
maintain and preserve the Water System in good repair and working order, and
also means all costs of water purchased or otherwise acquired for delivery by
the Water System (including the Lease Payments, any Parity Obligations and any
interim or renewed arrangement for water purchase or acquisition); but excluding
in all cases depreciation, replacement and obsolescence charges or reserves
therefor and amortization of intangibles or other bookkeeping entries of a
similar nature and any amounts transferred to the Lease Revenue Bonds Rate
Stabilization Reserve.
"Maintenance and Operation Cap" means annual costs not to exceed
$2,750,000 for Lease Payments, as such costs may be increased due to currently
unforeseeable cost increases which are out of the control of the Water District
and of the owner, operator and lenders with respect to the Ground Water Recovery
Plant.
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"Manager" means the General Manager of the Water District, or any other
person designated by the General Manager to act on behalf of the General
Manager.
"Maximum Annual Debt Service" means, as of the date of any calculation,
the maximum amount of principal, interest and mandatory sinking fund deposits
required to be paid with respect to the Bonds in the current or any future Bond
Year.
"Metropolitan Water Agreement" means that certain 1998 San Juan Basin
DeSalter Agreement between the Metropolitan Water District of Southern
California ("MWD"), the Municipal Water District of Orange County ("MWDOC"), and
the San Juan Basin Authority dated December 4, 1998, as amended effective
October 15, 2002 by that certain First Amendment thereto by and between MWD,
MWDOC, the Authority and the Water District.
"Moody's" means Moody's Investors Service, a municipal bond rating service
with offices in New York, New York.
"Net Insurance Proceeds" means any insurance or condemnation proceeds paid
with respect to the Property and the Service Contract Project Improvements and
remaining after payment therefrom of all expenses incurred in the collection
thereof.
"Net Revenues" means the amounts of Revenues of the Water System remaining
after payment therefrom of the Maintenance and Operation Costs.
"Operating Lease" means that certain Operating Lease of even date with the
Lease by and between the Water District and the Authority.
"Original Proceeds" means proceeds from the sale of the Bonds.
"Original Purchaser" means the first purchaser of the Bonds upon their
delivery by the Trustee.
"Outstanding," when used with reference to Bonds, means, as of any date,
Bonds theretofore or thereupon being issued under the Trust Agreement, except:
(a) Bonds canceled or delivered for cancellation by the Trustee on or
prior to such date (but excluding Bonds paid by the Bond Insurer);
(b) Bonds (or portions of Bonds) defeased as provided in the Trust
Agreement; and
(c) Bonds in lieu of or in substitution for which other Bonds shall have
been issued pursuant to the Trust Agreement.
"Parity Obligations" means any obligations secured on a parity with the
Lease Payments which are incurred in accordance with the Lease.
"Permitted Encumbrances" means as of any particular time: (1) liens for
general ad valorem taxes and assessments, if any, not then delinquent, or which
the Water District may, pursuant to the Trust Agreement, permit to remain
unpaid; (2) the Trust Agreement as it may be amended from time to time; (3) the
Lease Agreement and the Property Lease as they may be amended from time to time;
(4) any right or claim of any mechanic, laborer, materialman, supplier or vendor
filed or perfected in
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the manner prescribed by law to the extent permitted under the Lease; (5)
easements, rights of way, mineral rights, drilling rights and other rights,
reservations, covenants, conditions or restrictions which exist of record as of
the Closing Date and which the Water District certifies in writing on the
Closing Date will not materially impair the use of the Project; (6) easements,
rights of way, mineral rights, drilling rights and other rights, reservations,
covenants, conditions or restrictions established following the Closing Date, to
which the Authority and the Water District consent in writing and which the
Water District certifies will not materially impair the use of the Project or
real property substituted for the Project, as the case may be; and (7) liens
created in connection with the issuance of Parity Obligations.
"Project" means, collectively, the Property and the Service Contract
Project Improvements thereon, and any and all additions or modifications thereto
made as provided in the Lease.
"Project Account" means the account by that name established pursuant to
the Trust Agreement.
"Project Trust Fund" means the fund so designated which is established in
the Trust Agreement.
"Property" means the real property described from time to time in the
Lease.
"Property Lease" means the Property Lease between the City, as lessor, and
the Authority, as lessee, as amended and supplemented from time to time in
accordance with its terms.
"Purchase Option Price" means the amount to be paid pursuant to the Lease
Agreement, as the same may be amended, less the amount of any funds held by the
Trustee which are available for redemption of the Bonds plus interest on such
principal to the redemption date and premium, if any.
"Rating Agencies" means Moody's and S&P, any successors thereto or any
other nationally recognized rating service to the extent such rating agencies
are maintaining a rating in connection with the Bonds as requested by or on
behalf of the Water District.
"Rebatable Arbitrage" shall have the meaning attributed to such term in
the Trust Agreement.
"Rebate Fund" means the account so designated established pursuant to the
Trust Agreement.
"Rebate Regulations" means the Regulations issued under Section 148(f) of
the Code.
"Record Date" means the fifteenth day of the calendar month preceding an
Interest Payment Date.
"Redemption Account" means the Redemption Account established in the Trust
Agreement.
"Requisition" means the Requisition as set out in either Exhibit C or
Exhibit D attached to the Trust Agreement, as applicable.
"Reserve Account" means the Reserve Account established in the Trust
Agreement.
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"Reserve Requirement" means, as of any date of calculation, an amount
equal to the lesser of (i) Maximum Annual Debt Service; (ii) 10% of the proceeds
of the Bonds; or (iii) 125% of Average Annual Debt Service.
"Revenue Fund" means the enterprise fund of the Water District currently
identified as the "Water Enterprise Fund" of the Water District, any successor
fund or funds, and such other funds as the Board of Directors shall establish as
a part of the Revenue Fund which shall constitute the Revenue Fund maintained
pursuant to the Lease Agreement and the "Revenue Fund" maintained pursuant to
the Series 2002 Installment Purchase Agreement.
"Revenues" means all income, rents, rates, fees, charges and other moneys
derived from the ownership or operation of the Water System, including, without
limiting the generality of the foregoing,
(1) all income, rents, rates, fees, charges, business interruption
insurance proceeds or other moneys derived by the Water District from the
sale, furnishing and supplying of the water or other services, facilities,
and commodities sold, furnished or supplied through the facilities of or
in the conduct or operation of the business of the Water System;
(2) the earnings on and income derived from the investment of
amounts described in clause (1) above and from Water District reserves;
(3) the proceeds derived by the Water District directly or
indirectly from the sale, lease or other disposition of a part of the
Water System; and
(4) payments under Metropolitan Water Agreement;
but excluding
(a) customers' deposits or any other deposits or advances
subject to refund until such deposits or advances have become the
property of the Water District;
(b) any proceeds of taxes or assessments restricted by law
to be used by the Water District to pay bonds or other obligations
theretofore or thereafter issued.
Revenues shall also include all amounts transferred from the Lease Revenue
Bonds Rate Stabilization Reserve to the Revenue Fund during any Fiscal Year in
accordance with the Lease Agreement.
"S&P" or "Standard & Poor's" means Standard & Poor's Ratings Group, a
municipal bond rating service with offices in New York, New York.
"Series 2002 Certificates of Participation" means the San Juan Capistrano
Public Financing Authority Revenue Certificates of Participation, Series 2002,
executed and delivered on April 3, 2002 in the aggregate principal amount of
$8,525,000.
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"Series 2002 Installment Payments" means the installment payments of
interest and principal scheduled to be paid by the Water District under and
pursuant to the Series 2002 Installment Purchase Agreement, and any amendments
thereto.
"Series 2002 Installment Purchase Agreement" means that certain
Installment Purchase Agreement by and between the Water District and the San
Juan Capistrano Public Financing Authority, dated as of March 1, 2002.
"Service Contract" means that certain service contract by and between the
Water District and the Company, for the design, construction and operation of
the Project dated as of September 3, 2002.
"Service Contract Project Improvements" means those certain Project
Improvements, Project Structures and Project Equipment (as defined in the
Service Contract) each to be completed and located on the Sites (as defined in
the Service Contract) pursuant to the terms of the Service Contract.
"State" means the State of California.
"Supplemental Trust Agreement" means any agreement supplemental or
amendatory of the Trust Agreement.
"Tax Certificate" means the certificate by that name to be executed by the
Authority and the Water District on the Delivery Date to establish certain facts
and expectations and which contains certain covenants relevant to compliance
with the Code.
"Term" means the duration of the Lease Agreement pursuant to the
provisions in the Lease.
"Transaction Documents" means, collectively, the Lease, the Trust
Agreement, the Property Lease, the Service Contract and the Insurance and
Indemnity Agreement.
"Trust Agreement" means the Trust Agreement relating to the San Juan Basin
Authority, Lease Revenue Bonds (Ground Water Recovery Project) Issue of 2002,
dated as of December 1, 2002 entered into by and among the Water District, the
Authority and the Trustee and any and all Supplemental Trust Agreements.
"Trust Estate" means all right, title and interest of the Trustee in and
to the Trustee benefit provisions pursuant to Section 13.3 of the Service
Contract, all amounts received by the Trustee for the account of the Water
District pursuant to or with respect to the Letter of Credit and the Lease
Agreement including, without limitation, the Lease Payments and all amounts from
time to time deposited in the funds, accounts and subaccounts created pursuant
to the Trust Agreement, including all investments and investment earnings
thereon, excluding, however, all moneys deposited or required to be deposited in
the Rebate Fund.
"Trustee" means BNY Western Trust Company, a banking corporation, duly
organized and existing under and by virtue of the laws of the State of
California having a corporate trust office in Los Angeles, California, or such
other offices as the Trustee may designate.
"Water District" means Capistrano Valley Water District, a county water
district duly organized and existing under and by virtue of the laws of the
State, and its successors and assigns, including any successor by merger to all
of its rights and obligations.
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"Water System" means the entire water system of the Water District,
including, without limitation, all real property and buildings, and including
all improvements, works or facilities assessed, controlled or operated by the
Water District to provide water, as such improvements, works or facilities now
exist, together with all improvements and extensions to said water system later
acquired, constructed or organized.
LEASE AGREEMENT
REPRESENTATIONS, COVENANTS AND WARRANTIES
Representations, Covenants and Warranties of the Water District. The Water
District represents, covenants and warrants to the Authority as follows:
(a) Due Organization and Existence. The Water District is a county
water district duly organized and existing under and by virtue of the laws of
the State, with the power and authority to own, lease and acquire real and
personal property and equipment and to incur the obligations under the Lease
Agreement.
(b) Authorization; Enforceability. The laws of the State authorize
the Water District to enter into the Lease Agreement and to enter into the
transactions contemplated by and to carry out its obligations under the Lease
Agreement, and the Water District has duly authorized and executed the Lease
Agreement. The Lease Agreement constitutes the legal, valid and binding
obligation of the Water District, enforceable in accordance with its terms,
except to the extent limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles affecting the
rights of creditors generally.
(c) No Conflicts or Default; No Liens or Encumbrances. Neither the
execution and delivery of the Lease Agreement, nor the fulfillment of or
compliance with the terms and conditions of the Lease Agreement, nor the
consummation of the transactions contemplated thereby, conflicts with or results
in a breach of the terms, conditions or provisions of any restriction or any
agreement or instrument to which the Water District is now a party or by which
the Water District is bound, or constitutes a default under any of the
foregoing, or results in the creation or imposition of any lien, charge or
encumbrance whatsoever upon any of the property or assets of the Water District
or upon the Project, except for Permitted Encumbrances.
(d) Execution and Delivery. The Water District has duly authorized
and executed the Lease Agreement in accordance with the laws of the State.
(e) No Consent Required. There is no consent, approval,
authorization or other order of, or filing with, or certification by, any
regulatory authority having jurisdiction over the Water District required for
the consummation by the Water District of the transactions contemplated by the
Lease Agreement.
(f) No Litigation. There is no action, suit, proceeding, inquiry
or investigation, at law or in equity, before or by any court, governmental
agency, public office or body, pending or threatened against the Water District
affecting the existence of the Water District or the titles of its officers to
their respective offices or seeking to prohibit, restrain or enjoin the Water
District's covenants to make Lease Payments or in any way contesting or
affecting the validity or
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enforceability of the Lease Agreement or contesting the powers of the Water
District or its authority to enter into, adopt or perform its obligations under
the Lease Agreement or any amendment or supplement thereto, wherein an
unfavorable decision, ruling or finding would materially adversely affect the
Lease Agreement, or in which a final adverse decision could materially adversely
affect the operations of the Water District.
(g) Indemnification of Authority. To the extent permitted by law,
the Water District covenants to defend, indemnify and hold harmless the
Authority and its assigns (including specifically the Trustee), directors and
employees (collectively, the "Indemnified Party") against any and all losses,
claims, damages or liabilities, joint or several, including fees and expenses
incurred in connection therewith, to which such Indemnified Party may become
subject under any statute or at law or in equity or otherwise in connection with
the transactions contemplated by the Lease Agreement or the Trust Agreement, and
shall reimburse any such Indemnified Party for any legal expenses reasonably
incurred by it in connection with defending any actions, insofar as such losses,
claims, damages, liabilities or actions arise out of the transactions
contemplated by the Lease Agreement, the Trust Agreement or the Property Lease.
In particular, without limitation, to the extent permitted by law, the Water
District shall agree to indemnify and save the Indemnified Party harmless from
and against all claims, losses and damages, including legal fees and expenses,
to the extent arising out of (i) the use, maintenance, condition or management
of, or from any work or thing done on, the Project by the Water District, (ii)
any breach or default on the part of the Water District in the performance of
any of its obligations under the Lease Agreement or the Trust Agreement, (iii)
any act of negligence of the Water District or of any of its agents,
contractors, servants, employees or licensees with respect to the Project, (iv)
any act of negligence of any assignee or sublessee of the Water District with
respect to the Project or (v) the acceptance of, and performance of the duties
of the Trustee under the Trust Agreement. No indemnification is made under this
Section or elsewhere in the Lease Agreement for claims, losses or damages,
including legal fees and expenses arising out of the willful misconduct,
negligent acts or omissions, or breach of duty under the Lease Agreement, the
Property Lease or the Trust Agreement by the Authority, its officers, directors,
agents, employees, successors or assigns (including specifically the Trustee).
(h) General Tax and Arbitrage Covenant. The Water District
covenants that, notwithstanding any other provision of the Lease Agreement, it
shall not take any action, or fail to take any action, if any such action or
failure to take action would adversely affect the exclusion from gross income of
interest with respect to the Bonds under Section 103 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Water District shall not, directly or
indirectly, use or permit the use of proceeds of the Bonds or the Service
Contract Project Improvements, or any portion thereof, by any person other than
a governmental unit (as such term is used in Section 141 of the Code), in such
manner or to such extent as would result in the loss of exclusion from gross
income for federal income tax purposes of interest on the Bonds.
The Water District shall not take any action, or fail to take any action,
if any such action or failure to take action would cause the Bonds to be
"private activity bonds" within the meaning of Section 141 of the Code, and in
furtherance thereof, shall not make any use of the proceeds of the Bonds or the
Service Contract Project Improvements, or any portion thereof, or any other
funds of the Water District, that would cause the Bonds to be "private activity
bonds" within the meaning of Section 141 of the Code. To that end, so long as
any Bonds are outstanding, the Water District, with respect to such proceeds and
the Service Contract Project Improvements and such other funds, will comply with
applicable requirements of the Code and all regulations of the United States
Department
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of the Treasury issued thereunder and under Section 103 of the Code, to the
extent such requirements are, at the time, applicable and in effect.
The Water District shall not, directly or indirectly, use or permit the
use of any proceeds of any Bonds, or of the Service Contract Project
Improvements, or other funds of the Water District, or take or omit to take any
action, that would cause the Bonds to be "arbitrage bonds" within the meaning of
Section 148 of the Code. To that end, the Water District shall comply with all
requirements of Section 148 of the Code and all regulations of the United States
Department of the Treasury issued thereunder to the extent such requirements
are, at the time, in effect and applicable to the Bonds.
The Water District shall not make any use of the proceeds of the Bonds or
any other funds of the Water District, or take or omit to take any other action,
that would cause the Bonds to be "federally guaranteed" within the meaning of
Section 149(b) of the Code.
(i) The Lease Payments as due and payable pursuant to Exhibit A to
the Lease, do not in any year exceed the Maintenance and Operations Cap and,
except as Lease Payments exceed the Maintenance and Operations Cap in any year
due to acceleration thereof, shall constitute Maintenance and Operations Costs.
Representations, Covenants and Warranties of the Authority. The Authority
represents, covenants and warrants to the Water District as follows:
(a) Due Organization and Existence: Enforceability. The Authority
is a joint powers authority, duly organized, existing and in good standing under
and by virtue of the laws of the State, has the power to enter into the Lease
Agreement, the Property Lease and the Trust Agreement; is possessed of full
power to own and hold real and personal property, and to lease and sell the
same; and has duly authorized the execution and delivery of the Lease Agreement,
the Property Lease and the Trust Agreement. The Lease Agreement, the Property
Lease and the Trust Agreement constitute the legal, valid and binding
obligations of the Authority, enforceable in accordance with their respective
terms, except to the extent limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles affecting the
rights of creditors generally.
(b) No Encumbrances. The Authority will not pledge the Lease
Payments or Additional Payments or other amounts derived from the Project or
from its other rights under the Lease Agreement or the Property Lease, except
for Permitted Encumbrances and except as provided under the terms of the Lease
Agreement and the Trust Agreement.
(c) No Conflicts or Defaults: No Liens or Encumbrances. Neither
the execution and delivery of the Lease Agreement, the Property Lease or the
Trust Agreement nor the fulfillment of or compliance with the terms and
conditions thereof, nor the consummation of the transactions contemplated
thereby, conflicts with or results in a breach of the terms, conditions or
provisions of the Joint Exercise of Powers Agreement of the Authority or any
restriction or any agreement or instrument to which the Authority is now a party
or by which the Authority is bound, or constitutes a default under any of the
foregoing, or results in the creation or imposition of any lien, charge or
encumbrance whatsoever upon any of the property or assets of the Authority or
upon the Project, except for Permitted Encumbrances.
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(d) No Consent Required. There is no consent, approval,
authorization or other order of, or filing with, or certification by, any
regulatory authority having jurisdiction over the Authority required for the
consummation by the Authority of the transactions contemplated by the Lease
Agreement, the Trust Agreement or the Property Lease.
(e) No Litigation. There is no action, suit, proceeding, inquiry
or investigation, at law or in equity, before or by any court, governmental
agency, public office or body, pending or threatened against the Authority
affecting the existence of the Authority or the titles of its officers to their
respective offices or seeking to prohibit, restrain or enjoin the Authority's
receipt of, or assignment to the Trustee of, Lease Payments or in any way
contesting or affecting the validity or enforceability of the Lease Agreement,
the Trust Agreement or the Property Lease or contesting the powers of the
Authority or its authority to enter into, adopt or perform its obligations under
the Lease Agreement, the Trust Agreement or the Property Lease or any amendment
or supplement thereto, wherein an unfavorable decision, ruling or finding would
materially adversely affect the Lease Agreement, the Trust Agreement or the
Property Lease, or in which a final adverse decision could materially adversely
affect the operations of the Authority.
(f) Execution and Delivery. The Authority has duly authorized and
executed the Lease Agreement, the Property Lease and the Trust Agreement in
accordance with the Constitution and laws of the State.
(g) General Tax and Arbitrage Covenant. The Authority covenants
that, notwithstanding any other provision of the Lease Agreement, it will make
no use of the proceeds of the Bonds or of any other amounts or property,
regardless of the source, or take any action or refrain from taking any action
that may cause the obligations of the Water District under the Lease Agreement
to be "arbitrage bonds" subject to federal income taxation by reason of Section
148 of the Code.
In addition, the Authority covenants that it will not make any use of the
proceeds of the obligations provided in the Lease Agreement or in the Trust
Agreement or of any other funds of the Water District or the Authority or take
or omit to take any other action that would cause such obligations to be
"private activity bonds" within the meaning of Section 141 of the Code, or
"federally guaranteed" within the meaning of Section 149(b) of the Code. To that
end, so long as necessary to maintain the exclusion from gross income for
federal income tax purposes of the interest portion of the Lease Payments, the
Authority will comply with all requirements of such Sections and all regulations
of the United States Department of the Treasury issued thereunder and under
Section 103 of the Code, to the extent that such requirements are, at the time,
applicable and in effect.
(h) Maintenance of Corporate Existence. To the extent permitted by
law, the Authority agrees that during the Term it will maintain its existence as
a public entity, will not dissolve or otherwise dispose of all or substantially
all of its assets.
ACQUISITION AND CONSTRUCTION OF THE
SERVICE CONTRACT PROJECT IMPROVEMENTS
Deposit of Bond Proceeds. On the Closing Date, the Authority agrees to
deposit to the Project Account of the Project Trust Fund created under the Trust
Agreement the proceeds of the Authority's sale of the Bonds in the amount
specified in the Trust Agreement.
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Acquisition and Construction of the Service Contract Project Improvements.
The Water District agrees, as agent for the Authority, to exercise its rights
pursuant to the terms of the Service Contract as may be reasonably necessary to
cause the Service Contract Project Improvements to be acquired, constructed,
delivered and installed with the proceeds of Bonds made available by the
Trustee, pursuant to the Lease Agreement, and the Authority shall have no
responsibility with respect thereto.
Further Assurances and Corrective Instruments. The Authority and the Water
District agree that they will, from time to time, execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, such supplements
and such further instruments as may reasonably be required for correcting any
inadequate or incorrect description of the Property leased or intended so to be
or for carrying out the expressed intention of the Lease Agreement.
AGREEMENT OF LEASE; TERM OF
LEASE; LEASE PAYMENTS
Lease. The Authority leases the Property to the Water District upon the
terms and conditions set forth in the Lease Agreement.
Term. The Term of the Lease Agreement shall commence on the Closing Date
and shall end on December 1, 2035, unless extended pursuant to the Lease
Agreement (as so extended the "End of Term"), or unless terminated prior thereto
upon the earlier of the following events:
(a) Payment of All Lease Payments. The payment by the Water
District of all Lease Payments and any Additional Payments required under the
Lease Agreement; or
(b) Prepayment. The optional prepayment of all Lease Payments in
accordance with the Lease Agreement and the payment of all Additional Payments
due through such prepayment date; or
(c) Extraordinary Termination. The exercise by the Water District
of its right to terminate the Lease Agreement upon the occurrence of one or more
of the conditions therefor as described in the Lease Agreement.
Extension of Lease Term. If on December 1, 2035 the Bonds shall not be
fully paid, then the Term shall be extended until all Bonds shall be fully paid,
except that the Term shall in no event be extended beyond December 1, 2045.
Lease Payments.
(a) Time and Amount. Subject to the provisions of the Lease
Agreement (regarding prepayment of Lease Payments) and subject to the provisions
of the Lease Agreement (regarding termination of the Lease Agreement), the Water
District agrees to pay to the Authority, its successors and assigns, as annual
rental for the use and possession of the Project, the Lease Payments to be due
and payable in arrears on the days specified in the Lease Agreement or if such a
day is not a Business Day then on the next preceding Business Day (each such day
a "Lease Payment Date").
(b) Priority Payment. The Water District unconditionally pledges
the Revenues to the payment of the Lease Payments on a senior basis to its
pledge of Net Revenues to the payment of the Series 2002 Installment Payments up
to the Maintenance and Operation Cap and
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unconditionally pledges Net Revenues to the payment of Lease Payments on a
parity to its pledge of Net Revenues to the payment of the Series 2002
Installment Payments. The Water District covenants to make no changes in the
Series 2002 Installment Purchase Agreement or otherwise that impairs the
priority of such pledge and such priority shall survive any partial payment or
defeasance of the Series 2002 Installment Purchase Agreement or Series 2002
Certificates of Participation.
(c) Credits. Any amount held in the Debt Service Payment Account
on any Lease Payment Date (other than amounts required for payment of past due
principal or interest with respect to any Bonds that have matured or been called
for redemption and have not been presented for payment or amounts which have
been paid with respect to a prior Lease Payment Date but not yet distributed to
Bond Owners) shall be credited toward the Lease Payment then due and payable. No
Lease Payment need be made on any Lease Payment Date if the amounts then held in
the Debt Service Payment Account (other than those amounts excluded under the
prior sentence) are at least equal to the cumulative total of Lease Payments
then required to be paid.
(d) Rate on Overdue Payments. In the event the Water District
should fail to make any Lease Payment required by the Lease Agreement, or any
portion of any such Lease Payment, the Lease Payment or portion in default shall
continue as an obligation of the Water District until the amount in default
shall have been fully paid, and the Water District agrees to pay the same with
interest thereon, to the extent permitted by law, from the date such amount was
originally payable at the rate equal to the highest stated interest rate on any
of the Bonds as stated in the Trust Agreement.
No Withholding. Notwithstanding any dispute between the Authority and the
Water District, the Water District shall make all Lease Payments when due and
shall not withhold any Lease Payment pending the final resolution of such
dispute.
Obligation Absolute. Except as permitted pursuant to the Lease Agreement,
the obligation of the Water District to make the Lease Payments is absolute and
unconditional and until such time as the Lease Payments shall have been paid in
full (or provision for the payment thereof shall have been made pursuant to the
Lease Agreement), the Water District will not discontinue or suspend any Lease
Payments or Additional Payments required to be made by it under the Lease
Agreement when due, whether or not the Water System or any part thereof is
operating or operable or its use is suspended, interfered with, reduced or
curtailed or terminated in whole or in part, and such payments shall not be
subject to reduction whether by offset or otherwise and shall not be conditional
upon the performance or nonperformance by any party of any agreement for any
cause whatsoever.
Budget and Appropriation. The Water District covenants to take such action
as may be necessary to include all Lease Payments and Additional Payments due
under the Lease Agreement in its proposed annual budget and its final adopted
annual budget and to make the necessary appropriations for any amount of Lease
Payments and Additional Payments to be paid therefor.
Revenue Fund. The Water District agrees to maintain the Revenue Fund held
by the Treasurer of the Water District (the "Treasurer"). All Revenues shall be
deposited with the Treasurer and credited to the Revenue Fund. The Water
District shall transfer moneys from the Revenue Fund to pay Maintenance and
Operation Costs, including without limitation the Lease Payments in accordance
with the Lease Agreement and lease payments securing Parity Obligations, if any.
Any Revenues in excess of the amounts budgeted, as required, for the payment of
the Lease Payments and Maintenance and Operation Costs shall constitute surplus
revenues in the Revenue Fund. After all
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covenants contained in the Lease Agreement have been duly performed each year,
and provided that there are no amounts then owing to Authority or the Trustee by
the Water District, such surplus revenues may be used for: (1) payment of Series
2002 Installment Payments, (2) extensions and betterments of the Water System;
or (3) any lawful purpose of the Water District.
Rates and Charges. The Water District shall, to the maximum extent
permitted by law, fix, prescribe and collect rates and charges for water service
which will be at least sufficient to yield during each Fiscal Year Revenues
equal to one hundred percent (100%) of Maintenance and Operation Costs paid in
the immediately preceding Fiscal Year, provided that such costs shall include
the Lease Payments payable in such Fiscal Year, plus Additional Payments payable
in such Fiscal Year, plus the amount by which the amount on deposit in the Lease
Revenue Bonds Rate Stabilization Reserve on the last day of the immediately
preceding Fiscal Year was less than twenty-five percent (25%) of Maximum Annual
Debt Service as of such day. The Water District may make adjustments from time
to time in such rates and charges and may make such classification thereof as it
deems necessary, but shall not reduce the rates and charges then in effect
unless the Revenues from such reduced rates and charges will at all times be
sufficient to meet the requirements of this rate covenant.
No Priority for Additional Obligations. The Water District covenants that
no additional bonds, notes or obligations shall be issued or incurred by the
Water District which will have any priority in payment out of the Revenues over
the Lease Payments.
Limits on Additional Debt. The Water District covenants that, except for
obligations issued to prepay all or a portion of the Lease Payments, it will
issue obligations payable from Revenues on a parity basis with the Lease
Payments only if the Water District delivers to the Trustee prior to the
issuance of any Parity Obligations a certificate certifying that all of the
following additional conditions are met:
(a) The Water District is not in default under the terms of the
Lease Agreement; and
(b) the Revenues as shown by the books of the District for the
twelve (12) calendar months ending prior to the incurring of such additional
obligations shall have amounted to at least the sum of (x) one hundred percent
(100%) of Maintenance and Operation Costs, including without limitation Lease
Payments, for such twelve (12) calendar month period, plus (y) the amount by
which the amount on deposit on the Lease Revenue Bonds Rate Stabilization
Reserve on the date prior to the first day of such twelve (12) calendar month
period was less than twenty-five percent (25%) of Maximum Annual Debt Service;
for purposes of preparing the certificate or certificates described above, the
Water District may rely upon financial statements prepared by the Water
District, which have not been subject to audit by an Independent Certified
Public Accountant if audited financial statements for the Fiscal Year or period
are not available;
(c) the estimated Revenues for the twelve (12) calendar months
following the date of incurring such Parity Obligations will be at least equal
to one hundred percent (100%) of all Maintenance and Operation Costs, including
without limitation Lease Payments projected to be paid in the next succeeding
Fiscal Year and payments in the next succeeding Fiscal Year on Parity
Obligations to be outstanding immediately after the incurring of such Parity
Obligations, and the Additional Payments paid in the prior Fiscal Year as of the
date of incurring of such Parity Obligations;
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(d) the amount on deposit in the Lease Revenue Bonds Rate
Stabilization Reserve on the date of incurring such Parity Obligations will,
after giving effect to additional deposits in connection therewith, be at least
equal to twenty-five percent (25%) of the sum of (i) Maximum Annual Debt
Service, (ii) the maximum annual lease payment for such Parity Obligations, and
(iii) the Additional Payments paid in the prior Fiscal Year as of the date of
incurring of such Parity Obligations; and
(e) for so long as the Series 2002 Certificates of Participation
are outstanding, the Lease Payments plus lease payments securing all Parity
Obligations, including without limitation the Parity Obligations proposed to be
issued, do not in the aggregate exceed the Maintenance and Operation Cap.
For purposes of the computations to be made as described in (b) above, the
determination of the Revenues:
(i) may take into account any increases in rates and charges
which relate to the Water System and shall take into account any reduction in
such rates and charges, which will be effective prior to or at the time of
incurring such proposed additional obligations;
(ii) may take into account an allowance for any estimated
increase in such Revenues from any revenue producing additions to or
improvements or extensions of the Water System to be made with the proceeds of
such additional obligations or with the proceeds of obligations previously
issued, as shown by a certificate of the Water District; and
(iii) for the period contemplated by (c) above, Maintenance
and Operation Costs of the Water System shall be deemed to be the same as for
the period for which a calculation is done pursuant to (b) above, but adjusted,
if deemed necessary by the Water District, for any increased Maintenance and
Operation Costs of the Water System which are, in the judgment of the Water
District, essential to maintaining and operating the Water System.
Nothing in the Lease Agreement shall preclude the Water District from
issuing obligations which are subordinate to the payment of the Lease Payments.
In the event the additional indebtedness bears interest at a variable
rate, for purposes of the rate covenant and determining compliance with the
tests for issuance of additional indebtedness under the Lease Agreement, debt
service payable on variable rate additional indebtedness shall be computed
assuming such additional indebtedness bears interest at the rate quoted in The
Bond Buyer 25 Revenue Bond Index for the last week of the month preceding the
date when the Water District incurs such additional indebtedness, as published
in The Bond Buyer, plus one-half of one percent (0.50%), or if such index is no
longer published, another similar index to be selected by the Authority, or if
the Authority fails to select a replacement index, an interest rate equal to
eighty percent (80%) of the yield for outstanding United States Treasury bonds
having a maturity equivalent to that of the additional indebtedness proposed to
be incurred, or if there are no such Treasury bonds having equivalent
maturities, eighty percent (80%) of the lowest prevailing prime rate of any of
the five largest commercial banks in the United States ranked by assets.
Assignment of Lease Payments. Certain of the Authority's rights under the
Lease Agreement, including the right to receive and enforce payment of the Lease
Payments to be made by the Water District under the Lease Agreement, have been
absolutely assigned by the Authority to the
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Trustee, subject to certain exceptions, pursuant to the Trust Agreement, to
which assignments the Water District consents. The Authority directs the Water
District, and the Water District agrees, to pay to the Trustee at the Trustee's
corporate trust office, or to the Trustee at such other place as the Trustee
shall direct in writing, all Lease Payments or prepayments thereof payable by
the Water District under the Lease Agreement. The Authority will not assign or
pledge the Lease Payments or other amounts derived from the Project or from its
other rights under the Lease Agreement except as provided under the terms of the
Lease Agreement and the Trust Agreement, or its duties and obligations except as
provided under the Trust Agreement.
Use and Possession. The total Lease Payments and Additional Payments due
in any Fiscal Year shall be for the use and possession of the Project for such
Fiscal Year. During the Term of the Lease Agreement, the Water District shall be
entitled to the exclusive use of the Project subject only to the Permitted
Encumbrances.
Additional Payments. In addition to the Lease Payments, the Water District
shall also pay such amounts ("Additional Payments") as shall be required for the
payment of all administrative costs of the Authority relating to the Project,
including without limitation all expenses including usual and ordinary legal
fees and expenses, assessments, compensation and indemnification of the
Authority and the Trustee, any amounts required to be rebated to the federal
government in order to comply with the provisions of Section 148 of the Code,
any amounts required to be paid to the Trustee to replenish the Reserve Account
to the Reserve Requirement pursuant to the Trust Agreement, fees under any
Alternative Reserve Account Security instruments, taxes of any sort whatsoever
payable by the Authority as a result of its lease of the Project or undertaking
of the transactions contemplated in the Lease Agreement or in the Trust
Agreement, fees of auditors, accountants, attorneys or engineers, insurance
premiums or other items required by the Lease Agreement and all other necessary
administrative costs of the Authority or charges required to be paid by it in
order to comply with the terms of the Bonds or of the Trust Agreement or to pay
or indemnify the Trustee and its officers and directors. All such Additional
Payments to be paid under the Lease Agreement shall be paid when due directly by
the Water District to the respective parties to whom such Additional Payments
are owing.
Net-Net-Net Lease. The Lease Agreement shall be deemed and construed to be
a "net-net-net lease" and the Water District agrees that the Lease Payments
shall be an absolute net return to the Authority, free and clear of any
expenses, charges or set-offs whatsoever, except as expressly provided therein.
Lease Revenue Bonds Rate Stabilization Reserve. There is established a
special fund designated as the "Lease Revenue Bonds Rate Stabilization Reserve"
to be held by the Water District which fund the Water District agrees and
covenants to hold separate and apart from other funds so long as any Bonds
remain outstanding. The Water District is required to fund the Lease Revenue
Bonds Rate Stabilization Reserve in an amount equal to 25% of Maximum Annual
Debt Service (the "Rate Stabilization Requirement"). Money transferred by the
Water District to the Lease Revenue Bonds Rate Stabilization Reserve shall be
held in the Lease Revenue Bonds Rate Stabilization Reserve and applied in
accordance with the Lease Agreement. The Water District shall withdraw all or
any portion of the amounts on deposit in the Lease Revenue Bonds Rate
Stabilization Reserve and transfer such amounts to the Revenue Fund for
application in accordance with the Lease Agreement to the extent amounts in the
Revenue Fund are not sufficient to pay Maintenance and Operation Costs. The
Water District may expend amounts in the Lease Revenue Bonds Rate Stabilization
Reserve for any purpose permitted by law. The Rate Stabilization Requirement is
in addition to
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amounts required to be maintained in the separate rate stabilization reserve
established in connection with the Series 2002 Certificates of Participation and
amounts in the Lease Revenue Bonds Rate Stabilization Reserve are not available
to make payments relative to the Series 2002 Certificates of Participation.
Termination of Lease Agreement Prior to End of Term.
(a) Termination of Lease Agreement for Failure to Achieve Acceptance.
The Water District shall have the right to terminate the Lease in the event the
Water District exercises its right to terminate the Service Contract, provided
that the Water District shall have no right to terminate the Lease if and after
the Water District exercises any of its buy-out rights under the Service
Contract.
(b) Termination of Lease Agreement Upon an Event of Default by the
Company. The Water District shall have the right to terminate the Lease
Agreement in the event the Water District exercises its right, subject to
applicable notice and cure provisions set forth in the Service Contract, to
terminate the Service Contract upon the occurrence of an Event of Default (as
defined in the Service Contract) by the Company under Section 13.2(B)(2) of the
Service Contract, provided that the Water District shall have no right to
terminate the Lease if and after the Water District exercises any of its buy-out
rights under the Service Contract.
(c) Trustee Benefit Rights. The Water District and the Authority
acknowledge the rights of the Trustee as assignee of all rights of the Authority
pursuant to the Trust Agreement and rights of Trustee and Bond Insurer to notice
and rights to cure under the Service Contract.
(d) Obligations Not Conditioned on Service Contract. Except as provided
in (a) and (b) above, the Water District and Authority acknowledge the Water
District's obligations under the Lease Agreement are not conditioned or affected
by the Service Contract or the performance by any party of its obligations
thereunder, including, without limitation, termination of the Service Contract
pursuant to any circumstance other than as described in (a) or (b) above.
(e) Lock-out Provisions of Insurance and Indemnity Agreement. The Water
District and the Authority accept and agree to be bound by the lockout
provisions of the Insurance and Indemnity Agreement affecting the rights of the
Water District, City and Authority in the event of a termination of the Lease
Agreement pursuant thereto, subject to the express terms of the Insurance and
Indemnity Agreement. To the extent permitted by law, the District shall not
develop or construct Alternative Facilities during any cure period following an
Event of Default, including any Lock-out Period, if applicable, without the
prior written consent of the Bond Insurer.
INSURANCE AND CONDEMNATION
Insurance. The Water District will procure and maintain insurance on the
Project with responsible insurers at reasonable cost in such amount and against
such risks (including damage to or destruction of the Service Contract Project
Improvements) as are usually covered in connection with facilities similar to
the Service Contract Project Improvements, but not less than the lesser of the
full replacement cost or the principal amount of Bonds then outstanding, so long
as such insurance is available from reputable insurance companies.
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In the event of any damage to or destruction of the Project caused by the
perils covered by such insurance, the Net Insurance Proceeds thereof shall be
applied in accordance the Lease Agreement.
The Water District shall provide adequate reserves to cover the amount of
any deductible provisions of the insurance required to be maintained pursuant to
the Lease Agreement.
Cooperation. The Authority shall cooperate fully with the Water District
at the expense of the Water District in filing any proof of loss with respect to
any insurance policy maintained and in the prosecution or defense of any
prospective or pending condemnation proceeding with respect to the Project or
any portion thereof.
DAMAGE, DESTRUCTION AND EMINENT DOMAIN;
USE OF NET PROCEEDS
Application of Net Insurance Proceeds.
(a) Deposit in Insurance and Condemnation Account. The Water District
and/or the Authority shall transfer to the Trustee any Net Insurance Proceeds
received by the Water District and/or Authority in respect of any insurance
required by the Lease Agreement or in the event of any taking by eminent domain
or condemnation with respect to the Project, for deposit in the Insurance and
Condemnation Account by the Trustee in accordance with the Trust Agreement.
(b) Disbursement for Replacement or Repair of the Project. Upon receipt
of the certification described in paragraph (i) below and the requisition
described in paragraph (ii) below, the parties agree that the Trustee shall
disburse moneys in the Insurance and Condemnation Account to the person, firm or
corporation named in the requisition.
(i) Certification. The Authorized Representative of the Water
District must provide to the Authority and the Trustee a certificate stating
that the Net Insurance Proceeds available for such purpose, together with other
funds, if any, supplied by the Water District for such purpose in its sole and
absolute discretion, are sufficient to restore the Project to a value greater
than or equal to the value thereof prior to the insured event, and
(ii) Requisition. An Authorized Representative of the Water
District must state with respect to each payment to be made (1) the requisition
number, (2) the name and address of the person, firm or corporation to whom
payment is due, (3) the amount to be paid and (4) that each obligation mentioned
therein has been properly incurred, is a proper charge against the Insurance and
Condemnation Account, has not been the basis of any previous withdrawal
therefrom, and specifying in reasonable detail the nature of the obligation.
Any balance of the Net Insurance Proceeds remaining after such replacement
or repair has been completed as evidenced by a certificate of the Water District
shall be disbursed as provided in subsection (c) below.
In the event and to the extent the requirements of subsections (b)(i) and
(b)(ii) above are satisfied, the Water District shall begin such reconstruction,
repair or replacement promptly after such damage or destruction shall occur, and
shall continue and properly complete such reconstruction, repair or replacement
as expeditiously as possible, and shall pay out of such Net
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Insurance Proceeds and funds provided by it (if any) in its sole discretion all
costs and expenses in connection with such reconstruction, repair or replacement
so that the same shall be completed and the Project shall be free and clear of
all claims and liens except as provided in the Lease Agreement.
(c) Disbursement for Prepayment. If the Authorized Representative of
the Water District notifies the Trustee in writing of the Water District's
determination that the certification provided in the Lease Agreement cannot be
made or replacement or repair of any portion of the Project is not economically
feasible or in the best interest of the Water District, Net Insurance Proceeds
will be applied to the prepayment of Lease Payments, provided that if available
Net Insurance Proceeds exceed the amount necessary to prepay enough Lease
Payments and any other amounts due or to become due under the Lease Agreement or
the Trust Agreement such that the value of the remaining portion of the Project
is equal to or greater than the value of such portion of the Project prior to
the insured event, excess proceeds shall be available to be expended by the
Water District for any lawful purpose.
Eminent Domain Proceeds. If all or any part of the Service Contract
Project Improvements shall be taken by eminent domain proceedings rendering the
Project substantially unavailable for use by the Water District, the Net
Insurance Proceeds thereof shall be applied by the Water District to the
prepayment of Lease Payments as provided in Article X and to such other fund or
account as may be appropriate and used for the retirement of Bonds.
COVENANTS WITH RESPECT TO THE PROJECT
Use of the Project. The Water District represents and warrants that it has
an immediate need for all of the Project, which need is not expected to be
temporary or to diminish in the foreseeable future.
Leasehold Interest in the Project.
(a) Authority Holds Leasehold Interest During Term. During the Term,
the Authority shall hold a leasehold interest in the Project pursuant to the
Property Lease. The Authority shall take any and all actions reasonably
required, including but not limited to executing and filing any and all
documents, reasonably required to maintain and evidence the Authority's
leasehold interest in the Project at all times during the Term.
(b) Leasehold Interest Transferred to Authority at End of Term. Upon
the expiration of the Term as provided in the Lease Agreement, the Water
District's leasehold interest in the Project pursuant to the Lease shall
terminate, provided that, concurrent with such termination, the leasehold
interest of the Water District pursuant to the terms of the Operating Lease
shall become effective without the necessity of any additional document of
transfer.
Option to Prepay Lease Payments. The Water District may exercise an option
to prepay all or a portion of the Lease Payments in accordance with the Lease
Agreement and, by prepaying Lease Payments in the amounts necessary to cause the
termination of the Term as provided in the Lease Agreement (the "Purchase Option
Price"), terminate the Authority's leasehold interest in the Property under the
Property Lease.
Quiet Enjoyment. Subject only to Permitted Encumbrances, during the Term
the Authority shall provide the Water District with quiet use and enjoyment of
the Project, and the Water District
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shall during such Term peaceably and quietly have and hold and enjoy the
Project, without suit, trouble or hindrance from the Authority, or any person or
entity claiming under or through the Authority except as expressly set forth in
the Lease Agreement. The Authority will, at the request of the Water District,
join in any legal action in which the Water District asserts its right to such
possession and enjoyment to the extent the Authority may lawfully do so.
Notwithstanding the foregoing, the Authority shall have the right of access to
the Project as provided in the Lease Agreement.
Installation of Water District's Personal Property. The Water District may
at any time and from time to time, in its sole discretion and at its own
expense, install or permit to be installed items of equipment or other personal
property in or upon any portion of the Project. All such items shall remain the
sole personal property of the Water District, regardless of the manner in which
the same may be affixed to such portion of the Project, in which neither the
Authority nor the Trustee shall have any interest, and may be modified or
removed by the Water District at any time; provided that the Water District
shall repair and restore any and all damage to such portion of the Project
resulting from the installation, modification or removal of any such items of
equipment. Nothing in the Lease Agreement shall prevent the Water District from
purchasing items to be installed, provided that no lien or security interest
attaching to such items shall attach to any part of the Project.
Access to the Project. The Water District agrees that the Authority and
the Authority's successors or assigns shall have (1) the right at all reasonable
times to enter upon the Project or any portion thereof to examine and inspect
the Project, and (2) such rights of access to the Project as may be reasonably
necessary to cause the proper maintenance of the Project in the event of failure
by the Water District to perform its obligations under the Lease Agreement.
Maintenance, Utilities, Taxes and Assessments.
(a) Maintenance; Repair and Replacement. Throughout the Term of the
Lease Agreement, as part of the consideration for the rental of the Project, all
repair and maintenance of the Project shall be the responsibility of the Water
District, and the Water District shall pay for or otherwise arrange for the
payment of the cost of the repair and replacement of the Project resulting from
ordinary wear and tear or want of care on the part of the Water District or any
sublessee thereof. The Water District shall provide or cause to be provided all
security service, custodial service, power, gas, telephone, light, heating and
water, and all other public utility services for the Project. In exchange for
the Lease Payments provided for in the Lease Agreement, the Authority agrees to
provide only the Project.
(b) Tax and Assessments; Utility Charges. The Water District shall also
pay or cause to be paid all taxes and assessments, including but not limited to
utility charges of any type or nature charged to the Authority or the Water
District or levied, assessed or charged against any portion of the Project
(excluding the Property, with respect to which the City shall pay or cause to be
paid such amounts pursuant to the Property Lease) or the respective interests or
estates therein; provided that with respect to special assessments or other
governmental charges that may lawfully be paid in installments over a period of
years, the Water District shall be obligated to pay only such installments as
are required to be paid during the Term of the Lease Agreement as and when the
same become due.
(c) Contests. The Water District may, at its expense and in its name,
in good faith contest any such taxes, assessments, utility and other charges
and, in the event of any such
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contest, may permit the taxes, assessments or other charges so contested to
remain unpaid during the period of such contest and any appeal therefrom;
provided that prior to such nonpayment it shall furnish the Authority and the
Trustee with the opinion of an Independent Counsel to the effect that, by
nonpayment of any such items, the interest of the Authority in such portion of
the Project will not be materially endangered and that the Project will not be
subject to loss or forfeiture or lien. Otherwise, the Water District shall
promptly pay such taxes, assessments or charges or make provisions for the
payment thereof in form satisfactory to the Authority. The Authority will
cooperate fully in such contest, upon the request and at the expense of the
Water District.
Modification of the Project.
(a) Additions, Modifications and Improvements. Subject only to
applicable restrictions and conditions of the Service Contract, and provided the
Bond Insurer's prior written consent shall be required if to do so would (i)
render available funds insufficient to complete the Project, or (ii) require
additional time to complete the Project, the Water District shall, at its own
expense, have the right to make additions, modifications or improvements to any
portion of the Project if such additions, modifications or improvements are
necessary or beneficial for the use of such portion of the Project. Such
additions, modifications and improvements shall not in any way damage any
portion of the Project or cause them to be used for purposes other than those
authorized under the provisions of state and federal law or in any way which
would impair the exclusion from gross income for federal income tax purposes of
the interest portion of the Lease Payments; and the Project, upon completion of
any additions, modifications and improvements made pursuant to the Lease
Agreement, shall be of a value which is not less than the value of the Project
immediately prior to the making of such additions, modifications or
improvements.
(b) No Liens. The Water District will not create, will use its best
efforts to prevent the creation of, and will remove any mortgage or lien upon
the Water System or any property essential to the proper operation of the Water
System or to the maintenance of the Revenues, provided that, notwithstanding the
foregoing, the Water District may encumber the Water System with mechanic's or
materialman's liens, in connection with provision of administration buildings
and operational facilities, or with the prior written consent of the Bond
Insurer; and provided further, that the foregoing covenant shall not affect the
Authority's right to issue Parity Obligations in accordance with the Trust
Agreement and this Lease Agreement. Except for Permitted Encumbrances, the Water
District will not permit any mechanic's or other lien to be established or
remain against the Project for labor or materials furnished in connection with
any additions, modifications or improvements made by the Water District pursuant
to the Section; provided that if any such lien is established and the Water
District shall first notify or cause to be notified the Authority of the Water
District's intention to do so, the Water District may in good faith contest any
lien filed or established against the Project, and in such event may permit the
items so contested to remain undischarged and unsatisfied during the period of
such contest and any appeal therefrom and shall provide the Authority with full
security against any loss or forfeiture which might arise from the nonpayment of
any such lien, in form satisfactory to the Trustee of the Authority. The
Authority will cooperate fully in any such contest, upon the request and at the
expense of the Water District.
Liens. Except as permitted by the Lease Agreement, the Water District
shall not, directly or indirectly, create, incur, assume or suffer to exist any
mortgage, pledge, liens, charges, encumbrances or claims, as applicable, on or
with respect to the Project, other than Permitted Encumbrances and other than
the respective rights of the Authority and the Water District as provided in the
Lease Agreement, except with the prior written consent of the Bond Insurer.
Except as expressly provided
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in the Lease Agreement, the Water District shall promptly, at its own expense,
take such action as may be necessary to duly discharge or remove any such
mortgage, pledge, lien, charge, encumbrance or claim, for which it is
responsible, if the same shall arise at any time; provided that the Water
District may contest such lien or claim if it desires to do so, so long as such
contest will not materially, adversely affect the rights of the Water District
to the Project or the payment of Lease Payments under the Lease Agreement. The
Water District shall reimburse the Authority for any expense incurred by it in
order to discharge or remove any such mortgage, pledge, lien, charge,
encumbrance or claim.
Authority's Disclaimer of Warranties. THE AUTHORITY OR TRUSTEE MAKES NO
WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, AS TO THE VALUE, DESIGN,
CONDITION, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR FITNESS FOR
THE USE CONTEMPLATED BY THE WATER DISTRICT OF THE PROJECT OR PORTION THEREOF. In
no event shall the Authority or Trustee be liable for incidental, indirect,
special or consequential damages, in connection with or arising out of the Lease
Agreement, the Property Lease, or the Trust Agreement for the existence,
furnishing, functioning or Water District's use and possession of the Project.
Water District's Right to Enforce Warranties of Manufacturers, Vendors or
Contractors. The Authority irrevocably appoints the Water District its agent and
attorney-in-fact during the Term, so long as the Water District shall not be in
default under, to assert from time to time whatever claims and rights, including
without limitation, warranty claims, claims for indemnification and claims for
breach of any representations, with respect to the Project or the improvements
to the Project which the Authority may have against any manufacturer, vendor or
contractor, or any agents thereof. The Water District's sole remedy for the
breach of any such warranty, indemnification or representation shall be against
the manufacturer, vendor or contractor with respect thereto, and not against the
Authority, nor shall such matter have any effect whatsoever on the rights and
obligations of the Authority with respect to the Lease Agreement, including the
right to receive full and timely Lease Payments and to cause the Water District
to make all other payments due under the Lease Agreement. The Water District
shall be entitled to retain any and all amounts recovered as a result of the
assertion of any such claims and rights. The Authority shall, upon the Water
District's request and at the Water District's expense, do all things and take
all such actions as the Water District may request in connection with the
assertion of any such claims and rights.
The Water District expressly acknowledges that neither the Authority nor
the Trustee makes, or has made, any representation or warranty whatsoever as to
the existence or availability of such warranties of the manufacturer, vendor or
contractor with respect to any of the improvements on the Project.
Reconstruction; Application of Net Insurance Proceeds. If any useful
portion of the Service Contract Project Improvements shall be destroyed or is
damaged by fire or other casualty, or title to, or the temporary use of, such
portion shall be taken under the exercise of the power of eminent domain, the
Water District shall, as expeditiously as possible, continuously and diligently
prosecute or cause to be prosecuted the repair, reconstruction, restoration or
replacement thereof, unless it is determined under the provisions of the Lease
Agreement that such repair, reconstruction, restoration or replacement is not to
be undertaken.
Against Encumbrances. The Water District will not make any pledge of or
place any lien on the Net Revenues except as provided in the Lease Agreement.
The Water District may expend at any
C-25
time, or from time to time, general fund revenues or may issue evidences of
indebtedness or incur other obligations for any lawful purpose which are payable
from and secured by a pledge of and lien on general fund revenues.
Against Sale or Other Disposition of Project. The Water District will not
enter into any agreement or lease which impairs the operation of the Project or
any part thereof necessary to secure adequate water services for the community.
Any real or personal property which has become nonoperative or which is not
needed for the efficient and proper operation of the improvements on the
Project, or any material or equipment which has become worn out, may be sold if
such sale will not impair the ability of the Water District to pay Lease
Payments and if the proceeds of such sale are deposited in the Lease Payment
Fund.
Payment of Claims. The Water District will pay and discharge any and all
lawful claims for labor, materials or supplies which, if unpaid, might become a
lien on the Net Revenues or the funds or accounts created under the Lease
Agreement or on any funds in the hands of the Water District pledged to pay the
Bonds prior or superior to the lien of the Trust Agreement or which might impair
the security of the Bonds. Notwithstanding the foregoing, the Water District may
pledge, encumber or otherwise secure its obligations with the Net Revenues;
provided, that in all instances any such pledge, lien or security is wholly
subordinate and junior to the obligations of the Water District contained in the
Trust Agreement and the Lease Agreement.
Compliance with Lease. The Water District will neither take nor omit to
take any action under any contract if the effect of such act or failure to act
would in any manner impair or adversely affect the ability of the Water District
to pay Lease Payments; and the Water District will comply with, keep, observe
and perform all agreements, conditions, covenants and terms, express or implied,
required to be performed by it contained in all other contracts affecting or
involving the Project, to the extent that the Water District is a party thereto.
Compliance with Governmental Regulations. The Water District will duly
observe and comply with all valid regulations and requirements of any
governmental authority relative to the operation of the improvements on the
Project, or any part thereof, but the Water District shall not be required to
comply with any regulations or requirements so long as the validity or
application thereof shall be contested in good faith.
ASSIGNMENT, SUBLEASING AND AMENDMENT
Assignment by the Authority. Except as provided in the Lease Agreement and
in the Trust Agreement, the Authority will not assign the Lease Agreement, or
any right, title or interest of the Authority in and to the Lease Agreement, to
any other person, firm or corporation so as to impair or violate the
representations, covenants and warranties contained in the Lease Agreement.
Assignment and Subleasing by the Water District.
(a) Assignment. The Lease Agreement may not be assigned by the Water
District unless the Water District receives (i) prior written consent of the
Bond Insurer, which consent shall not be unreasonably withheld, and (ii) an
opinion of Bond Counsel, stating that such assignment does not adversely affect
the exclusion from gross income for federal income tax purposes or from State of
California personal income taxes of the interest portion of Lease Payments. In
the event that the Lease Agreement is assigned by the Water District, the
obligation to make Lease
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Payments and perform the other covenants of the Water District under the Lease
Agreement shall remain the obligation of the Water District.
(b) Sublease. The Water District may sublease any portion of the
Project, with the prior written consent of the Authority and Bond Insurer, which
consent shall not be unreasonably withheld, subject to all of the following
conditions:
(i) The Lease Agreement and the obligation of the Water District
to make Lease Payments and perform the other covenants of the Water District
under the Lease Agreement shall remain obligations of the Water District;
(ii) The Water District shall, within 30 days after the delivery
thereof, furnish or cause to be furnished to the Authority, the Bond Insurer and
the Trustee a true and complete copy of such sublease;
(iii) No sublease by the Water District shall cause the Project to
be used for a purpose other than a governmental or proprietary function
authorized under the provisions of the laws of the State; and
(iv) No sublease shall cause the interest portion of Lease
Payments, or any of them to become subject to federal income taxes or State of
California personal income taxes.
Amendments and Modifications. The terms of the Lease Agreement shall not
be waived, altered, modified, supplemented or amended in any manner whatsoever
except by written instrument signed by the Authority and the Water District,
with the written consent of the Bond Insurer and the Trustee subject to the same
conditions for amendment and modification of the Trust Agreement as set forth in
the Trust Agreement.
EVENTS OF DEFAULT AND REMEDIES
Events of Default Defined. The following shall be "Events of Default"
under the Lease Agreement and the terms "Events of Default" and "default" mean,
whenever they are used in the Lease Agreement, any one or more of the following
events:
(a) Payment Default. Failure by the Water District to pay any Lease
Payment or Additional Payment required to be paid under the Lease Agreement on
the date such payment is due under the Lease Agreement.
(b) Covenant Default. Failure by the Water District to observe and
perform any warranty, covenant, condition or agreement on its part to be
observed or performed or otherwise with respect to the Lease Agreement or in the
Property Lease, other than as referred to in clause (a) above, for a period of
30 days after written notice specifying such failure and requesting that it be
remedied has been given to the Water District by the Authority or the Trustee;
provided, however, if the failure stated in the notice cannot be corrected
within the applicable period, then no Event of Default shall have occurred, for
a period of 90 days after such applicable period so long as corrective action is
instituted by the Water District within the applicable period and diligently
pursued until the default is corrected. Notwithstanding the foregoing, an Event
of Default will have occurred concurrent with the failure by the Water District
to observe or perform any warranty, covenant, condition or agreement on its part
to be observed or performed pursuant to the Lease provisions relating to
C-27
assignment of Lease Payments, Lease Termination, maintaining insurance, liens
with respect to the Project and covenants against encumbrance, sale or disposal
of the Project.
(c) Bankruptcy or Insolvency. The filing by the Water District of a
case in bankruptcy, or the subjection of any right or interest of the Water
District under the Lease Agreement to any execution, garnishment or attachment,
or adjudication of the Water District as a bankrupt, or assignment by the Water
District for the benefit of creditors, or the entry by the Water District into
an agreement of composition with creditors, or the approval by a court of
competent jurisdiction of a petition applicable to the Water District in any
proceedings instituted under the provisions of the federal bankruptcy code, as
amended, or under any similar act which may thereafter be enacted.
(d) Breach of Representation. A material breach of any representation
of the Water District or the Authority under the Lease, for a period of 30 days
after written notice specifying such failure and requesting that it be remedied
has been given to the Water District by the Authority, the Trustee or the Bond
Insurer.
Remedies on Default. Whenever any Event of Default referred to in the
Lease Agreement shall have happened and be continuing, it shall be lawful for
the Authority to exercise any and all remedies available pursuant to law or
equity or granted pursuant to the Lease Agreement, and, in each and every such
case during the continuance of an Event of Default, the Authority may, with the
consent of the Bond Insurer, and by notice in writing to the Water District and
shall, at the direction of the Bond Insurer, declare the entire principal amount
of the unpaid Lease Payments and the accrued interest thereon to be due and
payable immediately, and upon any such declaration the same shall become
immediately due and payable, anything contained in the Lease Agreement to the
contrary notwithstanding. This section, however, is subject to the condition
that if at any time after the entire principal amount of the unpaid Lease
Payments and the accrued interest thereon shall have been so declared due and
payable and before any judgment or decree for the payment of the moneys due
shall have been obtained or entered the Water District shall deposit with the
Authority a sum sufficient to pay the unpaid principal amount of the Lease
Payments due prior to such declaration and the accrued interest thereon, with
interest on such overdue installments, at the rate or rates applicable to the
remaining unpaid principal balance of the Lease Payments, and the reasonable
expenses of the Authority, and any and all other defaults known to the Authority
(other than in the payment of the entire principal amount of the unpaid Lease
Payments and the accrued interest thereon due and payable solely by reason of
such declaration) shall have been made good or cured to the satisfaction of the
Authority or provision deemed by the Authority to be adequate shall have been
made therefor, then and in every such case the Authority, by written notice to
the Water District may rescind and annul such declaration and its consequences;
but no such rescission and annulment shall extend to or shall affect any
subsequent default or shall impair or exhaust any right or power consequent
thereon.
Anything in the Lease Agreement to the contrary notwithstanding, upon the
occurrence and continuance of an Event of Default as defined in the Lease
Agreement, so long as the Bond Insurer is not in default under the Bond
Insurance Policy, the Bond Insurer shall be entitled to control and direct the
enforcement of all rights and remedies granted to the Authority or the Trustee
under the Lease Agreement or otherwise available to the Authority or the
Trustee, including, without limitation: (i) the right to accelerate the portion
of each Lease Payment designated as and representing the principal of the Bonds
as described in the Lease Agreement and (ii) the right to annul any declaration
of acceleration, and the Bond Insurer shall also be entitled to approve all
waivers of Events of Default.
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Notwithstanding anything to the contrary contained in the Lease Agreement
or any of the Transaction Documents, none of the Authority, the Trustee, the
Bond Insurer, or the Bondholders shall have the right under the Lease Agreement
to re-enter or re-let the Project under any circumstances unless otherwise
permitted under the Transaction Documents.
Application of Funds Upon Acceleration. Upon the date of the declaration
of acceleration as provided in the Lease Agreement, all Revenues thereafter
received by the Water District shall be applied in the following order --
First, to the payment, without preference or priority, and in the event of
any insufficiency of such Revenues ratably without any discrimination or
preference, of the fees, costs and expenses of the Authority and Trustee, if
any, in carrying out the provisions of this article, including reasonable
compensation to their respective accountants and counsel and any other fees,
costs and expenses of the Trustee then owing for Trustee's services under the
Lease Agreement or under the Trust Agreement, including the reasonable fees and
expenses of its counsel and accountants; and
Second, to the payment of the Maintenance and Operation Costs including
without limitation the entire principal amount of the unpaid Lease Payments and
lease payments securing Parity Obligations, if any, and the accrued interest
thereon, with interest on the overdue installments at the rate or rates of
interest applicable to the Lease Payments and such lease payments securing
Parity Obligations if paid in accordance with their respective terms, provided
that, to the extent Lease Payments and lease payments securing Parity
Obligations exceed in any year the Maintenance and Operation Cap due to
acceleration, Revenues shall be applied to pay Lease Payments and lease payments
securing Parity Obligations on a parity basis with Series 2002 Installment
Payments.
Other Remedies of the Authority. The Authority shall have the right
(a) by mandamus or other action or proceeding or suit at law or in
equity to enforce its rights against the Water District or any director, officer
or employee thereof, and to compel the Water District or any such director,
officer or employee to perform and carry out its or his duties under the
agreements and covenants required to be performed by it or him contained in the
Lease Agreement;
(b) by suit in equity to enjoin any acts or things which are unlawful
or violate the rights of the Authority; or
(c) by suit in equity upon the happening of an Event of Default to
require the Water District and its directors, officers and employees to account
as the trustee of an express trust.
Notwithstanding anything contained in the Lease Agreement, the Authority
shall have no security interest in or mortgage on the Project, the Water System
or other assets of the Water District and no default under the Lease Agreement
shall result in the loss of the Project, the Water System, or other assets of
the Water District.
C-29
No Remedy Exclusive. Subject to the express limitation on remedies
described in the Lease Agreement, no remedy conferred therein upon or reserved
to the Authority is intended to be exclusive and every such remedy shall be
cumulative and shall be in addition to every other remedy given under the Lease
Agreement or now or thereafter existing at law or in equity. No delay or
omission to exercise any right or power accruing upon any default shall impair
any such right or power or shall be construed to be a waiver thereof, but any
such right and power may be exercised from time to time and as often as may be
deemed expedient. In order to entitle the Authority to exercise any remedy
reserved to it in the Lease Agreement it shall not be necessary to give any
notice, other than such notice as may be required in the Lease Agreement or by
law.
Agreement to Pay Attorneys Fees and Expenses. In the event either party to
the Lease Agreement should default under any of the provisions thereof and the
nondefaulting party should commence legal action or arbitration for the
collection of moneys or the enforcement of performance or observance of any
obligation or agreement on the part of the defaulting party contained therein,
the defaulting party agrees that it will pay on demand to the nondefaulting
party the reasonable attorneys fees, court costs and legal expenses incurred by
the nondefaulting party in such action or arbitration after payment of all fees
and expenses of the Trustee.
No Additional Waiver Implied by One Waiver. In the event any agreement
contained in the Lease Agreement should be breached by either party and
thereafter waived by the other party, such waiver shall be limited to the
particular breach so waived and shall not be deemed to waive any other breach
thereunder.
Trustee to Exercise Rights. Such rights and remedies as are given to the
Authority under the Lease Agreement have been assigned by the Authority to the
Trustee, to which assignment the Water District consents. Such rights and
remedies shall be exercised by the Trustee subject to the terms of the Trust
Agreement and the Lease Agreement.
MISCELLANEOUS
Liability of Water District Limited. Except for the pledge of Revenues
pursuant to the terms of the Lease Agreement, neither the faith and credit nor
the taxing power of the Water District is pledged to the payment of Lease
Payments under the Lease Agreement. Nevertheless, the Water District may, but
shall not be required to, advance for any of the purposes of the Lease Agreement
any funds of the Water District which may be made available to it for such
purposes.
The obligation of the Water District to make Lease Payments is a special
obligation of the Water District payable solely from the Revenues which are
irrevocably pledged, subject to the Lease Agreement.
Waiver of Personal Liability. No member, officer, agent or employee of the
Water District or the Water District shall be individually or personally liable
for the payment of Lease Payments under the Lease Agreement or be subject to any
personal liability or accountability by reason of the issuance thereof; but
nothing in the Lease Agreement contained shall relieve any such member, officer,
agent or employee from the performance of any official duty provided by law or
by the Trust Agreement.
Applicable Law. The Lease Agreement shall be governed by and construed in
accordance with the laws of the State.
C-30
TRUST AGREEMENT
ASSIGNMENT; DECLARATION OF TRUST;
REPRESENTATIONS AND RECITALS
Assignment of Lease Agreement. The Authority absolutely assigns all of its
rights, title and interest in the Lease Agreement to the Trustee for the benefit
of the Bondowners, and the Authority retains no right, title or interest therein
(other than its right to certain Additional Payments under the Lease Agreement).
The Water District consents to such assignment.
Assignment of Property Lease. The Authority absolutely assigns, for so
long as any Bond is Outstanding, all of its rights, title and interest in the
Property Lease to the Trustee for the benefit of the Bondowners, and the
Authority retains no right, title or interest therein (other than such right,
title and interest as may exist from and after the payment in full, or
defeasance pursuant to the Trust Agreement, of the Bonds). The Water District
consents to such assignment.
Declaration of Trust by Trustee. The Trustee declares that it holds and
will hold the Trust Estate upon the trusts set forth in the Trust Agreement and
for the use and benefit of the Bondowners.
Deposit of Moneys. In order to induce the Water District to proceed with
the lease of the Project from the Authority and to assure the Water District
that the funding of the Service Contract Project Improvements will be paid as
contemplated by the Lease Agreement, the Authority has executed the Lease
Agreement and caused the Trustee to authenticate and deliver the Bonds and from
the proceeds of the sale of the Bonds, the Trustee shall deposit into the
various accounts in the Project Trust Fund the amounts provided for in the Trust
Agreement.
BONDS, TERMS AND PROVISIONS
Payments from Trust Estate Only; Distribution of Trust Estate.
(a) All amounts payable by the Trustee with respect to the Bonds
pursuant to the Trust Agreement shall be paid only from the income of and
proceeds from the Trust Estate and only to the extent that the Trustee shall
have actually received sufficient income or proceeds from the Trust Estate to
make such payments in accordance with the terms of the Trust Agreement. Each
Bondowner agrees to look solely to the income of and the proceeds from the Trust
Estate to the extent available for distribution to such holder as provided in
the Trust Agreement, and each Bondowner agrees that the Trustee is not
personally liable to any Bondowner for any amounts payable under the Trust
Agreement or subject to any liability under the Trust Agreement except liability
under the Trust Agreement as a result of negligence or willful misconduct by the
Trustee.
(b) So long as the Bonds shall be Outstanding, all amounts of Lease
Payments (including without limitation prepayments), Additional Payments,
payments received by the Trustee pursuant to or with respect to the Letter of
Credit, indemnity payments and other payments of any kind constituting a part of
the Trust Estate payable to the Trustee, shall be paid directly to the Trustee
for distribution, in accordance with the Trust Agreement, to or for the
Bondowners.
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Negotiability, Transfer and Registry.
(a) Each Bond shall be transferable only upon the books of the Trustee
which shall be kept for that purpose at the corporate trust office of the
Trustee, by the Bondowner in person or by his attorney duly authorized in
writing, upon surrender thereof together with a written instrument of transfer
satisfactory to the Trustee duly executed by the Bondowner or his duly
authorized attorney. Upon the transfer of any such Bond the Trustee shall
deliver in the name of the transferee a new Bond or Bonds of the same aggregate
principal amount and maturity and interest rate as the surrendered Bond.
(b) The Trustee may deem and treat the person in whose name any Bond
shall be registered upon the books of the Trustee as the absolute owner of such
Bond, whether such Bond shall be overdue or not, for the purpose of receiving
payment of, or on account of, the principal, if any, of and interest with
respect to such Bond and for all other purposes; and all such payments so made
to any such Bondowner or upon his order shall be valid and effectual to satisfy
and discharge the liability upon such Bond to the extent of the sum or sums so
paid; and the Trustee shall not be affected by any notice to the contrary.
Regulations with Respect to Exchanges and Transfers. In all cases in which
the privilege of exchanging Bonds or transferring Bonds is exercised, the
Trustee shall authenticate and deliver Bonds in accordance with the provisions
of the Trust Agreement. All Bonds surrendered in any such exchanges or transfers
shall forthwith be canceled by the Trustee pursuant to the Trust Agreement. For
every such exchange or transfer of Bonds, except an exchange of a temporary Bond
for a definitive Bond, the Trustee may make a charge sufficient to reimburse it
for any tax, fee or other governmental charge required to be paid with respect
to such exchange or transfer. The cost of printing any new Bonds and any
services rendered or any expenses incurred by the Trustee in connection with any
exchange or transfer shall be paid by the Water District (except governmental
taxes and charges and the costs of replacing lost, stolen or mutilated Bonds
which shall be paid by the Owner). The Trustee shall not be required to transfer
or exchange any Bonds selected for redemption or within the 15 days before the
selection of Bonds for redemption.
Bonds Mutilated, Destroyed, Stolen or Lost. In case any Bond shall become
mutilated or be destroyed, stolen or lost, the Trustee shall authenticate and
deliver a new Bond of like maturity and principal amount as the Bond so
mutilated, destroyed, stolen or lost, in exchange and substitution for such
mutilated Bond, upon surrender and cancellation of such mutilated Bond, or in
lieu of and substitution for the Bond, destroyed, stolen or lost, upon receipt
by the Trustee of evidence satisfactory to the Trustee that such Bond has been
destroyed, stolen or lost and proof of ownership thereof, and upon furnishing
the Trustee with indemnity satisfactory to the Trustee and complying with such
other regulations as the Trustee may prescribe and paying such expenses as the
Trustee may incur. All Bonds so surrendered to the Trustee shall be canceled by
it pursuant to the Trust Agreement. Any such new Bonds issued pursuant to the
Section in substitution for Bonds mutilated or alleged to be destroyed, stolen
or lost shall be equally secured by and entitled to equal and proportionate
benefits of, with all other Bonds delivered under the Trust Agreement, any
moneys or securities held by the Trustee for the benefit of the Bondowners.
Temporary Bonds. Until the definitive Bonds are prepared, the Trustee may
authenticate and deliver, in the same manner as is provided for the Trust
Agreement, in lieu of definitive Bonds, one or more temporary Bonds
substantially of the tenor of the definitive Bonds in lieu of which such
temporary Bond or Bonds are issued, in any authorized denomination, and with
such omissions,
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insertions and variations as may be appropriate to temporary Bonds. The Trustee
at the expense of the Water District shall authenticate and, upon the surrender
of such temporary Bonds and the cancellation of such surrendered temporary
Bonds, shall, without charge to the Owners thereof, in exchange therefor,
deliver definitive Bonds, of the same aggregate principal amount and maturity as
the temporary Bonds.
ESTABLISHMENT AND ADMINISTRATION
OF FUNDS AND ACCOUNTS
Establishment of Project Trust Fund. There is established with the Trustee
a special trust fund to be designated as the "Project Trust Fund"; which shall
be held in trust by the Trustee for the benefit of the Bondholders pending
application of the funds on deposit therein as provided in the Trust Agreement.
The Trustee shall keep the Project Trust Fund separate and apart from all other
funds and moneys held by it. Within the Project Trust Fund there are established
the following accounts (the "Accounts"): (i) Debt Service Payment Account, and a
Capitalized Interest Subaccount therein; (ii) Reserve Account; (iii) Costs of
Issuance Account; (iv) Project Account; (vi) Redemption Account; and (vii)
Insurance and Condemnation Account. There is established by the Trust Agreement
with the Trustee a special trust fund to be designated as the "Rebate Fund",
which the Trustee shall maintain and manage pursuant to the provisions of the
Trust Agreement.
Project Account.
(a) There shall be credited to the Project Account any funds from time
to time deposited with Trustee for such purpose. The Trustee shall keep the
Project Account separate and apart from all other funds and accounts held by it
and shall administer the Project Account as provided in the Trust Agreement and
the Lease Agreement.
(b) Except as provided in the Trust Agreement, the Trustee shall
disburse funds from the Project Account in the manner and at the times described
in the Trust Agreement. The Trustee shall disburse funds from the Costs of
Issuance Account upon receipt by the Trustee of an executed Requisition;
additionally, the Trustee shall transfer all amounts on deposit in the Costs of
Issuance Account on August 1, 2003 to the Project Account and thereafter, upon
receipt of a Requisition of the Water District, the Trustee shall pay Costs of
Issuance from the Project Account.
(c) Upon receipt by the Trustee of a Requisition of the Water District
that the Service Contract Project Improvements have been completed and that all
costs thereof and Cost of Issuance have been paid any amounts then remaining in
the Project Account not encumbered or needed to pay costs of the Service
Contract Project Improvements and Cost of Issuance, as evidenced by a
certificate of a Requisition of Water District, shall be deposited by Trustee in
the Rebate Fund if the Water District has notified the Trustee such funds are
needed to pay arbitrage rebate payments to the federal government and the
balance shall be deposited in the Debt Service Payment Fund and be applied from
time to time on behalf of the Water District as a credit against the next
subsequent Lease Payments. In no event will amounts in the Project Account after
the date three years from the Delivery Date be invested at a yield in excess of
the yield on the Bonds within the meaning of Section 148 of the Code and the
regulations thereunder.
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Debt Service Payment Account.
(a) In addition to the moneys required to be deposited in the Debt
Service Payment Account pursuant to the Trust Agreement, all Lease Payments
received by the Trustee shall be deposited by the Trustee in the Debt Service
Payment Account immediately upon their receipt. On or about October 1 of each
year the Trustee shall give written notice to the Water District of the amount
of Lease Payments for the next following Bond Year. The Trustee shall pay from
the Debt Service Payment Account on each Interest Payment Date, the amount
required for the interest payable on such date and the amount required for the
principal payable, if any, on such date. Such amounts shall be applied by the
Trustee on the due dates thereof. The Trustee shall apply amounts on deposit in
the Capitalized Interest Subaccount to the payment of interest on the Bonds as
it becomes due and payable prior to the application of any other amounts in the
Debt Service Payment Account therefor.
(b) Upon receipt of any proceeds of a draw on the Letter of Credit, the
Trustee shall promptly deposit all such amounts in the Debt Service Payment
Account. The Trustee shall thereafter apply such amounts received, together with
interest earnings thereon, to pay, on the next succeeding Interest Payment Date,
interest and principal, if any, then due and payable on the Bonds. The Trustee
shall notify the Water District and the Bond Insurer that Lease Payments next
coming due are permitted to be reduced by such draw amounts received, together
with interest earning thereon. The Water District shall not have any liability
to any party for any failure to direct the Trustee to draw on the Letter of
Credit or for any delay in so drawing.
(c) The Trustee shall also transfer to the Redemption Account from the
Debt Service Payment Account any amount available therein to pay principal,
premium, if any, and the accrued interest on the Bonds redeemed pursuant to the
Trust Agreement.
Reserve Account.
(a) The Reserve Requirement shall be maintained by the Trustee in the
Reserve Account until the Lease Payments are paid in full pursuant to the terms
of the Lease Agreement, or the Bonds have been redeemed in full, or the Trust
Agreement is terminated. The Reserve Requirement may be recalculated at any time
upon the request of the Water District, and the Trustee shall maintain the
Reserve Account thereafter at a level equal to the recalculated Reserve
Requirement. The Trustee shall apply moneys in the Reserve Account as provided
in the Trust Agreement. The Trustee shall value the investments of monies in the
Reserve Account pursuant to the Trust Agreement.
(b) If on any Interest Payment Date the amount in the Debt Service
Payment Account shall be less than the amount required for the interest payable
with respect to the Bonds on said date, the Trustee shall withdraw from the
Reserve Account and deposit in the Debt Service Payment Account the amount
necessary to make good the deficiency. Any amounts transferred from the Reserve
Account pursuant to this subsection (b) shall not be considered payment in full
or in part of any Lease Payment and shall, upon receipt of the delinquent Lease
Payment, be repaid from such Lease Payment to the Reserve Account.
(c) If on an Interest Payment Date the amount in the Debt Service
Payment Account shall be less than the amount required for the principal payable
with respect to the Bonds on such date, the Trustee shall withdraw from the
Reserve Account and deposit in the Debt Service
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Payment Account the amount necessary to make good the deficiency. Any amounts
transferred from the Reserve Account pursuant to this subsection (c) shall not
be considered payment in full or in part of a Lease Payment and shall, upon
receipt of the delinquent Lease Payment, be repaid from such Lease Payment to
the Reserve Account.
(d) Whenever the amount in the Reserve Account, together with the
amount in the Debt Service Payment Account, is sufficient to pay in full all
Outstanding Bonds in accordance with their terms, the funds on deposit in said
Reserve Account shall be transferred to the Debt Service Payment Account and
applied to the payment of Bonds. Any provision of the Trust Agreement to the
contrary notwithstanding, so long as there shall be held in the Debt Service
Payment Account an amount sufficient to pay in full all Outstanding Bonds in
accordance with their terms, no deposits shall be required to be made into the
Reserve Account.
(e) Moneys in the Reserve Account shall be used solely for the purpose
of:
(i) making up deficiencies in the Debt Service Payment Account
as provided in the Trust Agreement; or
(ii) making up deficiencies in the Debt Service Payment Account
as provided in the Trust Agreement;
(iii) providing for the payment of the final Lease Payment in
which event the Trustee shall transfer all amounts on deposit in the Reserve
Account to the Debt Service Payment Account to be applied as a credit against
said final Lease Payment; or
(iv) providing for the redemption in full of all Outstanding
Bonds as provided in the Trust Agreement.
(f) If ten (10) days prior to any Lease Payment Date the amount on
deposit in the Reserve Account is less than the Reserve Requirement, the Trustee
shall notify the Authority and the Water District and the Water District shall
include the amount necessary to meet the Reserve Requirement with its Lease
Payment on such Lease Payment Date as an Additional Payment.
(g) The Authority reserves the right to substitute, at any time and
from time to time, one or more letters of credit, Alternative Reserve Account
Security, bond insurance policies or other form of guaranty, in any case
approved in writing by the Bond Insurer from a financial institution the
long-term unsecured obligations of which are rated to the Bond Insurer's
satisfaction in substitution for or in place of all or any portion of the
Reserve Requirement, under the terms of which the Trustee is unconditionally
entitled to draw amounts when required for the purposes thereof. Upon deposit by
the Authority with the Trustee of any such letter of credit, surety bond, bond
insurance policy or other form of guaranty, the Trustee shall withdraw from the
Reserve Account and transfer to the Water District an amount equal to the
principal amount of such letter of credit, Alternative Reserve Account Security,
bond insurance policy or other form of guaranty.
If and to the extent that the Reserve Account has been funded with a
combination of cash (or Investment Securities) and a Alternative Reserve Account
Security, then all such cash (or Investment Securities) shall be completely used
before any demand is made on such Alternative Reserve Account Security, and
replenishment of the Alternative Reserve Account Security shall be made prior to
any replenishment of any such cash (or Investment Securities). If the Reserve
Fund is
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funded, in whole or in part, with more than one Alternative Reserve Account
Security, then any draws made against such Alternative Reserve Account Security
shall be made pro-rata.
Redemption Account.
(a) The Trustee shall apply moneys in the Redemption Account as
provided in the Trust Agreement. Amounts in the Redemption Account shall be
applied to the redemption of Bonds in accordance with the Trust Agreement.
Interest on Bonds so redeemed shall be paid from the Debt Service Payment
Account, except to the extent Net Insurance Proceeds are used to pay such
interest, and all expenses in connection with such redemption shall be paid by
the Water District as Additional Payments.
(b) The Trustee shall deposit in the Redemption Account as received,
all moneys, if any, paid to it by the Water District for prepayment of Lease
Payments pursuant to the Lease Agreement. All of said moneys shall be set aside
in the Redemption Account for the purpose of redeeming the Bonds in advance of
their maturity and shall be applied on or after the date of redemption
designated pursuant to the Trust Agreement to the payment of principal,
redemption premium, if any, and accrued interest, if any, with respect to the
Bonds to be redeemed upon presentation and surrender of such Bonds.
Insurance and Condemnation Account. Subject to the provisions of the Lease
Agreement, the proceeds of insurance maintained pursuant to the Lease Agreement
against physical loss of or damage to the Project or any portion thereof shall
be deposited in the Insurance and Condemnation Account immediately upon receipt
and applied as provided in Article VI of the Lease Agreement.
Deposits of Money; Payment Procedure.
(a) All moneys required to be held by the Trustee under the provisions
of the Trust Agreement shall be deposited with the Trustee. All moneys deposited
under the provisions of the Trust Agreement with the Trustee shall be held in
trust and applied only in accordance with the provisions of the Trust Agreement,
and the Project Trust Fund shall be a trust fund for the purposes thereof.
(b) All moneys deposited with the Trustee shall be credited to the
particular account to which such moneys belong.
Investment of Certain Accounts and Subaccounts. Subject to the
requirements of the Trust Agreement, all moneys in the funds, accounts and
subaccounts held by the Trustee under the Trust Agreement shall be invested as
follows:
(a) Moneys held in the Debt Service Payment Account and the Reserve
Account shall be invested and reinvested by the Trustee pursuant to the Section.
Moneys held in the Insurance and Condemnation Account may be invested and
reinvested in Investment Securities which mature not later than such times as
shall be necessary to provide moneys when needed for payments to be made from
such Account. Moneys in the Redemption Account shall be invested only in
Investment Securities which have a maturity no longer than 30 days. The Trustee
shall make all such investments of moneys held by it in accordance with written
instructions received from an Authorized Representative of the Water District at
least two Business Days in advance of the investment. The Authorized
Representative of the Water District may instruct the Trustee in making
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any investment in any Investment Securities with moneys in any Account
established under the Trust Agreement, to combine such moneys with moneys in any
other Account, but solely for purposes of making such investment in such
Investment Securities. In the absence of instructions from the Water District,
the Trustee shall invest solely in Investment Securities set forth in (B)(5) of
the definition thereof and shall provide notice to the Water District of such
investment by means of its customary statements; provided, however, the Trustee
shall incur no liability for its failure to so notify the Water District. Absent
negligence or willful misconduct on its part, the Trustee shall have no
liability or responsibility for any loss resulting from any investment made in
accordance with the provisions of the Trust Agreement. The Trustee shall have no
obligation to pay additional interest or maximize investment income on any funds
held by it and neither the Authority, nor the Bond Owners shall have any claim
of any kind against the Trustee in connection with such Investments.
(b) Any income or interest earned by the Debt Service Payment Account
due to the investment thereof shall be retained in the Debt Service Payment
Account and applied as a credit against the Lease Payments due on the next
occurring Lease Payment Date and deemed to be the payment of the interest
portion thereof to the extent thereof and then to principal, provided that all
income or interest earned by the Capitalized Interest Subaccount of the Debt
Service Payment Account shall be transferred to the Project Account on or before
each June 2 and December 2, until Acceptance, and shall thereafter be applied as
provided in the first sentence of this subsection (b).
(c) Any income or interest earned by the Reserve Account due to the
investment thereof shall be paid into the Project Account until Acceptance and
shall thereafter be paid into the Debt Service Payment Account to the extent
that it would cause the amount in the Reserve Account to exceed the Reserve
Requirement. Such amount shall be applied as a credit against the Lease Payments
due on the next occurring Lease Payment Date and deemed to be the payment of the
interest portion thereof to the extent thereof and then to principal.
(d) Moneys held in the Project Account shall be invested and reinvested
by the Trustee in Investment Securities maturing as required to make timely
Project payments pursuant to the Service Contract. Any income or interest earned
by the Project Account due to the investment thereof shall be retained in the
Project Account and used for purposes of the Project Account until Acceptance,
and after Acceptance shall be transferred to the Debt Service Payment Account.
(e) Nothing in the Trust Agreement shall prevent any Investment
Securities acquired as investments of funds held thereunder from being issued or
held in book-entry form on the books of the Department of the Treasury of the
United States of America.
(f) The Trustee or an affiliate may act as principal or agent in the
acquisition or disposition of an investment and shall be entitled to its
customary fees therefor pursuant to a prior written fee agreement with the
Authority and the Water District.
(g) If at any time after investment therein an investment ceases to
meet the criteria set forth in the definition of Investment Securities as
determined by a valuation of such investment and such obligation, aggregated
with other non-conforming investments, exceeds ten percent (10%) of invested
funds, such investment shall be sold or liquidated unless otherwise approved by
the Water District and the Bond Insurer.
(h) Investments (except investment agreements) in Trust Agreement funds
and accounts and subaccounts shall be valued by the Trustee as frequently as
deemed necessary by the
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Authority, but not less often than semi-annually nor more often than monthly, at
the fair market value thereof, exclusive of accrued interest. Deficiencies in
the amount on deposit in any fund or account resulting from a decline in market
value shall be restored not later than the next succeeding semiannual valuation
date which is at least six months after the valuation date. Investments
purchased with funds on deposit in the Reserve Account shall have an average
aggregate weighted term to maturity not greater than five years.
The Trustee shall terminate any repurchase agreement upon a failure of the
counterparty thereto to maintain the requisite collateral percentage after the
restoration period and, if not paid by the counterparty in federal funds against
transfer of the repo securities, liquidate the collateral.
The Trustee shall give notice to any provider of an investment agreement
in accordance with the terms of the investment agreement so as to receive funds
thereunder with no penalty or premium paid.
The Trustee shall, upon actual knowledge of the withdrawal or suspension
of either of the ratings of an investment agreement provider or a drop in the
ratings thereon below "A," so notify the Authority and, if so directed by the
Authority, shall demand further collateralization of the agreement or
liquidation thereof.
The Water District acknowledges that to the extent regulations of the
Comptroller of the Currency or other applicable regulatory entity grant the
Water District the right to receive brokerage confirmations of security
transactions as they occur, the Water District will not receive such
confirmations to the extent permitted by law. The Trustee will furnish the Water
District periodic cash transaction statements which the Trustee may make any
investments under the Trust Agreement through its own bond or investment
department or trust investment department, or those of its parent or any
affiliate. The Trustee or any of its affiliates may act as sponsor, advisor or
manager in connection with any investments made by the Trustee under the Trust
Agreement.
Valuation and Sale of Investments. Obligations purchased as an investment
of moneys in any fund, account or subaccount created under the provisions of the
Trust Agreement shall be deemed at all times to be a part of such fund, account
or subaccount and any profit realized from the liquidation of such investment
shall be credited to, and any loss resulting from the liquidation of such
investment shall be charged to, the computation of net interest earned on the
moneys and investments of such fund, account or subaccount.
The value of the above investments shall be determined as provided in
"Value" below. "Value," which shall be determined as of the 10th day of March
and September of each year unless otherwise directed in writing by the
Authority, means that the value of any investments shall be calculated as
follows:
(a) as to investments the bid and asked prices of which are published
on a regular basis in The Wall Street Journal (or, if not there, then in The New
York Times): the average of the bid and asked prices for such investments so
published on or most recently prior to such time of determination;
(b) as to investments the bid and asked prices of which are not
published on a regular basis in The Wall Street Journal or The New York Times:
the average bid price at such time of determination for such investments by any
two nationally recognized government securities
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dealers (selected by the Trustee in its absolute discretion) at the time making
a market in such investments or the bid price published by a nationally
recognized pricing service;
(c) as to certificates of deposit and bankers acceptances: the face
amount thereof, plus accrued interest;
(d) as to any investment not specified above: the value thereof
established by prior agreement between the Authority, the Trustee and the Water
District; and
(e) alternatively, by any reasonable method used by the Trustee and
approved by the Water District, including without limitation, computer pricing
services.
Except as otherwise provided in the Trust Agreement, the Trustee shall
sell or present for redemption or transfer as provided in the next sentence any
obligation so purchased as an investment whenever it shall be requested in
writing by an Authorized Representative of the Water District so to do or
whenever it shall be necessary in order to provide moneys to meet any payment or
transfer from any fund, account or subaccount held by it. In lieu of such sale
or presentment for redemption, the Trustee may, in making the payment or
transfer from any fund, account or subaccount mentioned in the preceding
sentence, transfer such investment obligations or interest appertaining thereto
if such investment obligations shall mature or be collectable at or prior to the
time the proceeds thereof shall be needed and such transfer of investment
obligations may be made in book entry form. Absent bad faith or willful
misconduct or negligence on its part, the Trustee shall not be liable or
responsible for making or liquidating any such investment in the manner provided
above or for any loss resulting from any such investment.
Costs of Issuance Account. The Trustee shall deposit to the Costs of
Issuance Account the amount required under the Trust Agreement. Moneys on
deposit in the Costs of Issuance Account shall be applied to pay Costs of
Issuance upon submission of a written request from an Authorized Representative
of the Authority to the Trustee stating that the amount is justly due and owing,
has not been the subject of any other written request which has been paid by the
Trustee and is a proper Costs of Issuance. Any moneys remaining in the Costs of
Issuance Account on May 1, 2003 shall be transferred to the Project Account.
Rebate Fund.
(a) Establishment. The Trustee shall establish a special fund
designated the "Rebate Fund" (the "Rebate Fund"). All amounts at any time on
deposit in the Rebate Fund shall be held by the Trustee in trust, to the extent
required to satisfy the requirement to make rebate payments to the United States
pursuant to Section 148 of the Code and the Treasury Regulations promulgated
thereunder. Such amounts shall be free and clear of any lien under the Trust
Agreement and shall be governed by the Trust Agreement and by the Tax
Certificate executed by the Water District and Authority. The Trustee shall have
no independent responsibility to, or liability resulting from its failure to,
enforce compliance by the Authority with the Rebate Requirement. All money at
any time deposited in the Rebate Fund shall be held by the Trustee in trust for
payment to the United States Treasury. All amounts on deposit in the Rebate Fund
for the Bonds shall be governed by the Trust Agreement and the Tax Certificate
for the Bonds, unless and to the extent that the Authority delivers to the
Trustee an opinion of Bond Counsel that the exclusion from gross income for
federal income tax purposes of interest on the Bonds will not be adversely
affected if such requirements are not satisfied.
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(b) Deficiencies in the Rebate Fund. In the event that, prior to the
time of any payment required to be made from the Rebate Fund, the amount in the
Rebate Fund is not sufficient to make such payment when such payment is due, the
Authority shall calculate or cause to be calculated the amount of such
deficiency and deposit an amount received from any legally available source
equal to such deficiency prior to the time such payment is due.
(c) Disposition of Unexpended Moneys. Any moneys remaining in the
Rebate Fund after redemption and payment of the Bonds and the payments described
in the Trust Agreement being made may be withdrawn by the Authority and utilized
in any lawful manner by the Authority.
(d) Record Keeping. The Authority shall retain records of all
determinations made under the Trust Agreement until six years after the complete
retirement of the Bonds.
(e) Survival of Defeasance. Notwithstanding anything in the Trust
Agreement to the contrary, the obligation to comply with the requirements of the
Trust Agreement shall survive the payment in full or defeasance of the Bonds.
COVENANTS, EVENTS OF DEFAULT, REMEDIES OF BONDOWNERS
AND LIMITATIONS OF LIABILITY
Trustee to Enforce Lease Agreement and Property Lease. The Trustee
covenants and agrees with the Bondowners and the Bond Insurer, subject to the
provisions of the Trust Agreement to exercise the rights assigned to it under
the Lease Agreement and the Property Lease as assignee of the Authority, and to
enforce the Property Lease against the City as provided therein and the Lease
Agreement against the Water District as provided under the Trust Agreement, all
subject to the provisions of the Trust Agreement.
Against Amendment or Termination of Property Lease. The Authority and the
Water District covenant and agree not to amend the Property Lease in a manner
that is adverse to the Bond Insurer, or to terminate the Property Lease, without
the prior written consent of the Bond Insurer, so long as the Insurance Policy
is still in effect and the Bond Insurer is not in default thereunder.
Notice of Non-Payment. In the event of delinquency in the payment of Lease
Payments due by the Water District pursuant to the Lease Agreement, the Trustee
shall promptly give written notice of the delinquency and the amount thereof to
the Water District and the Company.
Assignment of Rights. Pursuant to the Trust Agreement, the Authority has
transferred, assigned and set over to the Trustee all of the Authority's rights
in and to the Property Lease and the Lease Agreement including without
limitation all of the Authority's right to receive Lease Payments from the Water
District under the Lease Agreement, its right to receive the proceeds of
insurance or of an eminent domain award on the Service Contract Project
Improvements, its right to pursue the remedies to which it is entitled in the
event of default by the Water District under the Lease Agreement (a "Lease
Default Event"), its right to enforce payment of such Lease Payments when due,
or otherwise protect its interests and enforce its rights under the Lease
Agreement.
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Events of Default. The following events shall be Events of Default under
the Trust Agreement:
(a) Default in the due and punctual payment of the principal on any
Bonds when and as the same shall become due and payable, whether at maturity as
therein expressed, by proceedings for redemption, by acceleration, or otherwise.
(b) Default in the due and punctual payment of any installment of
interest on any Bonds when and as the same shall become due and payable.
(c) Default by the Authority in the observance of any of the other
covenants, agreements or conditions on its part in the Trust Agreement or in the
Bonds contained, if such default shall have continued for a period of thirty
(30) days after written notice thereof, specifying such default and requiring
the same to be remedied, shall have been given to the Authority by the Trustee;
provided, however, that if in the reasonable opinion of the Authority the
default stated in the notice can be corrected, but not within such thirty (30)
day period, such default shall not constitute an Event of Default under the
Trust Agreement if the Authority shall commence to cure such default within such
thirty (30) day period and thereafter diligently and in good faith cure such
failure in a reasonable period of time (provided that in the event such breach
is not cured within 60 days, the Water District shall obtain the prior written
consent of the Bond Insurer to pursue the same to completion beyond the grace
period provided herein).
(d) The occurrence and continuation of a Lease Default Event.
(e) Notwithstanding the foregoing, no effect shall be given to payments
made under the Insurance Policy in determining whether an Event of Default
exists under Section 5.04 of the Trust Agreement.
Any reorganization or liquidation plan with respect to the Water District
(excepting only a merger of the Water District with the City, as to which none
of the Bond Insurer, the Authority or the Trustee have any approval or consent
rights) must be acceptable to the Bond Insurer. In the event of any
reorganization or liquidation, the Bond Insurer shall have the right to vote on
behalf of all Owners who hold Bond Insurer-insured Bonds absent a default by the
Bond Insurer under the applicable Insurance Policy insuring such Bonds.
Anything in the Trust Agreement to the contrary notwithstanding, upon the
occurrence and continuance of an Event of Default as defined in the Trust
Agreement, the Bond Insurer shall be entitled to control and direct the
enforcement of all rights and remedies granted to the Owners or the Trustee for
the benefit of the Owners under the Trust Agreement or otherwise available to
the Owners or Trustee, including, without limitation: (i) the right to
accelerate the principal of the Bonds as described in the Trust Agreement, and
(ii) the right to annul any declaration of acceleration. The Bond Insurer shall
also be entitled to approve all waivers of Events of Default.
Upon the occurrence of an Event of Default, the Trustee may, with the
consent of the Bond Insurer, and shall, at the direction of the Bond Insurer or
60% of the Owners with the consent of the Bond Insurer, by written notice to the
Authority and Water District and the Bond Insurer, declare the principal of the
Bonds to be immediately due and payable, whereupon that portion of the principal
of the Bonds thereby coming due and the interest thereon accrued to the date of
payment shall, without
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further action, become and be immediately due and payable, anything in the Trust
Agreement or in the Bonds to the contrary notwithstanding.
Application of Funds. All moneys received by the Trustee pursuant to any
right given or action taken under the provisions of the Lease Agreement shall be
applied by the Trustee in the order following upon presentation of the several
Bonds, and the stamping thereon of the payment if only partially paid, or upon
the surrender thereof if fully paid -
First, to the payment of the costs and expenses of the Trustee and of the
Bondowners in declaring such Event of Default, including reasonable compensation
to its or their agents, attorneys, consultants and counsel and any fees and
expenses due or owing the Trustee;
Second, to the payment of the whole amount then owing and unpaid with
respect to the Bonds for principal and interest and in case such moneys shall be
insufficient to pay in full the whole amount so owing and unpaid with respect to
the Bonds, then to the payment of such principal and interest without preference
or priority of principal over interest, or of interest over principal, or of any
installment over any other installment of interest, ratably to the aggregate of
such principal and interest.
Institution of Legal Proceedings. If one or more Events of Default shall
happen and be continuing, the Trustee in its discretion may, and upon the
written request of the Owners of a majority in principal amount of the Bonds
then Outstanding, and upon being indemnified to its satisfaction therefor,
shall, proceed to protect or enforce its rights or the rights of the Owners of
Bonds as provided in the Lease Agreement or in the Trust Agreement.
Non-Waiver. Nothing in the Trust Agreement or in the Bonds, shall affect
or impair the obligation of Water District to pay or prepay the Lease Payments
in accordance with and subject to the terms and provisions of the Lease
Agreement, or affect or impair the right of action, which is also absolute and
unconditional, of the Bondowners to institute suit to enforce and collect such
payment. No delay or omission of the Trustee or of any Bondowners to institute
suit to enforce and collect such payment and no delay or omission of the Trustee
or of any Bondowner of any of the Bonds to exercise any right or power arising
upon the happening of any Event of Default shall impair any such right or power
or shall be construed to be a waiver of any such Event of Default or an
acquiescence therein, and every power and remedy given by the Trust Agreement to
the Trustee or to the Bondowner may be exercised from time to time and as often
as shall be deemed expedient by the Trustee or the Bondowner.
Remedies Not Exclusive. No remedy in the Trust Agreement conferred upon or
reserved to the Trustee or the Bondowners is intended to be exclusive of any
other remedy, and every such remedy shall be cumulative and shall be in addition
to every other remedy given under the Trust Agreement or now or thereafter
existing, at law or in equity or by statute or otherwise.
Power of Trustee to Control Proceedings. Except as provided in the Trust
Agreement, in the event that the Trustee, upon the happening of an Event of
Default, shall have taken any action, by judicial proceedings or otherwise,
pursuant to its duties thereunder, whether upon its own discretion or upon the
request of the Bondowners of a majority in principal amount of the Bonds then
Outstanding, it shall have full power, in the exercise of its discretion for the
best interests of the Owners of the Bonds, with respect to the continuance,
discontinuance, withdrawal, compromise, settlement or other disposal of such
action; provided, however, that the Trustee shall not discontinue,
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withdraw, compromise or settle, or otherwise dispose of any litigation pending
at law or in equity, without the consent of a majority in aggregate principal
amount of the Bonds Outstanding.
Limitation on Bondowners' Right to Sue. Except as provided in the Trust
Agreement, no Bondowner shall have the right to institute any suit, action or
proceeding at law or in equity, for any remedy under or upon the Trust
Agreement, unless (a) such Bondowner shall have previously given to the Trustee
written notice of the occurrence of an Event of Default; (b) the Bondowners of
at least twenty-five percent (25%) in aggregate principal amount of all the
Bonds then Outstanding shall have made written request upon the Trustee to
exercise the powers granted to the Trustee as assignee of the Authority or to
institute such action, suit or proceeding in its own name; (c) said Bondowner
shall have tendered to the Trustee reasonable indemnity against the costs,
expenses and liabilities to be incurred in compliance with such request; and (d)
the Trustee shall have refused or omitted to comply with such request for a
period of sixty (60) days after such written request shall have been received
by, and said tender of indemnity shall have been made to, the Trustee.
Such notification, request, tender of indemnity and refusal or omission
are declared, in every case, to be conditions precedent to the exercise by any
Bondowner of any remedy thereunder; it being understood and intended that no one
or more Bondowners shall have any right in any manner whatever by his or their
action to enforce any right under the Trust Agreement, except in the manner
provided in the Trust Agreement, and that all proceedings at law or in equity
with respect to an Event of Default shall be instituted, had and maintained in
the manner therein provided and for the equal benefit of all Bondowners of the
Outstanding Bonds.
The right of any Bondowner of any Bond to receive payment of said
Bondowner's interest in the Lease Payments as the same become due, or to
institute suit for the enforcement of such payment, shall not be impaired or
affected without the consent of such Bondowner, notwithstanding the foregoing
provisions of the Trust Agreement.
Amendment of Lease Agreement. The terms of the Lease Agreement shall not
be waived, altered, modified, supplemented or amended in any manner whatsoever
except by written instrument signed by the Authority and the Water District,
with the written consent of the Bond Insurer and the Trustee subject to the same
conditions as set forth in the Trust Agreement.
Reconstruction; Application of Insurance Proceeds. If any useful portion
of the Service Contract Project Improvements shall be destroyed or is damaged by
fire or other casualty, or title to, or the temporary use of, such portion shall
be taken under the exercise of the power of eminent domain, the Water District
shall as expeditiously as possible, continuously and diligently prosecute or
cause to be prosecuted the repair, reconstruction, restoration or replacement
thereof, unless it is determined under the provisions of the Lease Agreement
that such repair, reconstruction, restoration or replacement is not to be
undertaken. The proceeds of any insurance paid on account of such damage or
destruction, shall be held by the Trustee in the Insurance and Condemnation
Account and made available for, and to the extent necessary be applied to, the
cost of such repair, reconstruction, restoration or replacement. Such moneys
deposited in the Insurance and Condemnation Account shall be applied and paid
out by the Trustee as provided in the Lease Agreement. Pending such application,
such proceeds shall be invested, upon direction of an Authorized Representative
of the Water District, by the Trustee in Investment Securities which mature not
later than such times as shall be necessary to provide moneys when needed to pay
such cost of repair, reconstruction, restoration or replacement. The interest,
as well as the gain, if any, on such investments shall remain a part of any such
Insurance and Condemnation Account to be applied as provided in the Trust
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Agreement. The proceeds of any insurance not applied within six months after
receipt thereof by Trustee to repairing, reconstructing, restoring or replacing
damaged or destroyed property, or in respect of which notice in writing of
intention to apply the same to the work of repairing, reconstruction, restoring
or replacing the property damaged or destroyed shall not have been given to the
Trustee by Water District within such six months, or which Water District shall
at any time notify the Trustee are not to be so applied, shall be deposited in
the Redemption Account and applied to the redemption of Bonds pursuant to the
Trust Agreement. After the completion of any repair, reconstruction,
restoration, any remaining insurance proceeds shall be deposited in the
Redemption Account and applied to the redemption of Bonds pursuant to the Trust
Agreement.
Accounts and Reports.
(a) The Trustee shall keep proper books of record and account in which
complete and correct entries shall be made of its transactions relating to each
fund and account established under the Trust Agreement and the principal amount
of the Bonds and which shall at all reasonable times upon reasonable prior
notice be subject to the inspection of the Water District and Bondowners.
(b) The Trustee shall provide the Water District, promptly after the
end of each calendar month a statement of its transactions during such month
relating to each fund, account or subaccount held by it under the Trust
Agreement.
No Obligation by the Water District to Bondowners. Except for the payment
of Lease Payments when due in accordance with the Lease Agreement and any other
payment due and owing by the Water District under the Lease Agreement and the
performance of the other covenants and agreements of the Water District
contained in the Lease Agreement or under the Trust Agreement, the Water
District shall have no obligation or liability to any of the other parties or to
the Bondowners with respect to the Trust Agreement or the terms, execution,
delivery or transfer of the Bonds, or the distribution of Lease Payments to the
Bondowners by the Trustee.
No Obligation with Respect to Performance by Trustee. The Water District
or the Authority shall not have any obligation or liability to any of the other
parties or to the Bondowners with respect to the performance by the Trustee of
any duty imposed upon it under the Trust Agreement.
No Liability to Bondowners for Payment. Except as provided in the Trust
Agreement, neither the Trustee nor the Authority shall have any obligation or
liability to the Bondowners with respect to the payment of the Lease Payments by
the Water District when due, or with respect to the performance by the Water
District of any other covenant by it in the Lease Agreement.
Possession and Enjoyment. So long as no Lease Termination shall have
occurred, from and after the acquisition, construction and installation by the
Water District of the Service Contract Project Improvements in accordance with
the terms of the Lease Agreement, the Water District shall during such Lease
Term peaceably and quietly have and hold and enjoy the Project, without suit,
trouble or hindrance from the Trustee, except as expressly set forth in the
Lease Agreement. The Trustee will, at the written request of the Water District
and at the Water District's cost, join in any legal action in which the Water
District asserts its right to such possession and enjoyment, to the extent
Trustee lawfully may do so; provided, however, the Trustee may decline to join
in such action if it believes it will be exposed to liability for which it has
not been satisfactorily indemnified against.
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Tax Covenants. Notwithstanding any other provision of the Trust Agreement,
absent an opinion of Bond Counsel that the exclusion from gross income of
interest on the Bonds will not be adversely affected for federal income tax
purposes, the Authority and the Water District covenant to comply with all
applicable requirements of the Code necessary to preserve such exclusion from
gross income and specifically covenant, without limiting the generality of the
foregoing, as follows:
(a) Private Activity. The Authority and the Water District will not
take or omit to take any action or make any use of the proceeds of the Bonds,
the Service Contract Project Improvements or of any other moneys or property
which would cause the Bonds to be "private activity bonds" within the meaning of
Section 141 of the Code.
(b) Arbitrage. The Authority and the Water District will make no use of
the proceeds of the Bonds, the Project or of any other amounts or property,
regardless of the sources, or take or omit to take any action which would cause
the Bonds to be "arbitrage bonds" within the meaning of Section 148 of the Code;
(c) Federal Guarantee. The Authority and the Water District will make
no use of the proceeds of the Bonds, the Project, or take or omit to take any
action that would cause the Bonds to be "federally guaranteed" within the
meaning of Section 149(b) of the Code;
(d) Information Reporting. The Authority and the Water District will
take or cause to be taken all necessary action to comply with the informational
reporting requirement of Section 149(e) of the Code;
(e) Hedge Bonds. The Authority and the Water District will make no use
of the proceeds of the Bonds, the Project, or any other amounts or property,
regardless of the source, or take or omit to take any action that would cause
the Bonds to be considered "hedge bonds" within the meaning of Section 149(g) of
the Code unless the Authority and the Water District take all necessary action
to assure compliance with the requirements of Section 149(g) of the Code to
maintain the exclusion from gross income of interest on the Bonds for federal
income tax purposes; and
(f) Miscellaneous. The Authority and the Water District will take no
action inconsistent with their expectations stated in the Tax Certificate and
will comply with the covenants and requirements stated therein and incorporated
by reference in the Trust Agreement.
Parity Obligations. Neither the Authority nor the Water District shall
issue or incur evidences of indebtedness or other obligations payable from the
Lease Payments having any priority in payment over the Bonds. The Water District
may at any time issue obligations secured on a parity with the Lease Payments
which are incurred in accordance with the Lease Agreement.
Continuing Disclosure. The Water District covenants and agrees that it
will comply with and carry out all of the provisions of the Continuing
Disclosure Agreement dated the date of issuance of the Bonds. Notwithstanding
any other provision of the Trust Agreement, failure of the Water District to
comply with the Continuing Disclosure Agreement shall not be considered an Event
of Default; however, any participating underwriter, holder or beneficial owner
of the Bonds may take such actions as may be necessary and appropriate to compel
performance, including seeking mandate or specific performance by court order.
C-45
CONCERNING THE TRUSTEE
Employment of Trustee. The Authority, pursuant to the Trust Agreement,
appoints BNY Western Trust Company as Trustee. The Trustee will, prior to an
Event of Default, and after the curing of all Events of Default which may have
occurred, perform such duties and only such duties as are specifically set forth
in the Trust Agreement, and no implied covenants or obligations shall be read
into the Trust Agreement against the Trustee. The Trustee shall, during the
existence of any Event of Default (which has not been cured in accordance with
the Trust Agreement), exercise such of the rights and powers vested in it by the
Trust Agreement, and use the same degree of care and skill in their exercise, as
a prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
Trustee Acceptance of Duties. The Trustee shall signify its acceptance of
the duties and obligations imposed upon it by executing and delivering the Trust
Agreement; and by executing such acceptance the Trustee shall be deemed to have
accepted such duties and obligations with respect to all the Bonds thereafter
delivered, but only, however, upon the terms and conditions set forth therein.
Evidence on Which Trustee May Act.
(a) The Trustee, upon receipt of any notice, resolution, request,
consent, order, certificate, report, opinion, bond, or other paper or document
furnished to it pursuant to any provision of the Trust Agreement, shall examine
such instrument to determine whether it conforms to the requirements thereof and
shall not be liable for acting upon any such instrument believed by it to be
genuine and to have been signed or presented by the proper party or parties. The
Trustee may consult with counsel, who may or may not be counsel to the Water
District, and the opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken or suffered by it
thereunder in good faith and in accordance therewith. The Trustee may rely on
and shall not be liable for acting upon the written instructions of the
Authority and the Water District and such employees and representatives of the
Water District as the Water District may thereinafter designate in writing.
(b) Whenever the Trustee shall deem it necessary or desirable that a
matter be proved or established prior to taking or suffering any action under
the Trust Agreement, such matter (unless other evidence in respect thereof be
therein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate of an Authorized Representative of the Water
District, and such certificate shall be full warrant for any action taken or
suffered in good faith under the provisions and terms of the Trust Agreement;
but in its discretion the Trustee may in lieu thereof accept other evidence of
such fact or matter or may require such further or additional evidence as to it
may seem reasonable.
(c) Except as otherwise expressly provided in the Trust Agreement, any
request, order, notice or other direction required or permitted to be furnished
pursuant to any provision thereof by the Authority or the Water District to the
Trustee shall be sufficiently executed in the name of the Authority or the Water
District by an Authorized Representative of the Authority or the Water District,
as appropriate.
(d) Notwithstanding any other provision of the Trust Agreement, in
determining whether the rights of the Bondholders will be adversely affected by
any action taken pursuant to the
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terms and provisions of the Trust Agreement, the Trustee shall consider the
effect on the Bondholders as if there were no Insurance Policy.
Obligations of Trustee. Upon receipt of written notice of the termination
of the Lease Agreement, the Trustee shall at the written request of the Water
District convey any right, title or interest in the Project created by the Trust
Agreement free and clear of all liens thereon which Trustee may have.
Compensation. The Water District has agreed in the Lease Agreement to pay
to the Trustee compensation for all services rendered under the Trust Agreement
and also all expenses, charges, counsel fees and other disbursements, including
those of its attorneys, agents, and employees, incurred in and about the
performance of its powers and duties under the Trust Agreement, at the rates and
charges specified in a separate written fee agreement among the Authority, the
Water District and the Trustee. The Water District shall reimburse the Trustee
for any advances of its own funds to make payments for which the Water District
and Authority is obligated under the Trust Agreement, with interest at the
maximum rate allowed by law.
Resignation of Trustee. The Trustee may at any time resign and be
discharged of the duties and obligations created by the Trust Agreement by
giving not less than 60 day's written notice to the Water District, the Bond
Insurer, and the Bondowners, specifying the date when such resignation shall
take effect, and such resignation shall take effect upon the day specified in
such notice unless previously a successor shall have been appointed by the Water
District and the Authority or the Bondowners as provided in the Trust Agreement,
in which event such resignation shall take effect immediately on the appointment
of such successor; provided that in the event the Water District and the
Authority are unable to appoint a successor on or before the date specified, the
resigning Trustee shall continue to serve under the Trust Agreement until a
successor is appointed pursuant to the Trust Agreement.
Removal of Trustee. The Trustee may be removed upon 60 days' written
notice by an instrument or concurrent instruments in writing, filed with the
Trustee, and signed by the Owners of a majority in principal amount of the Bonds
then Outstanding or their attorneys-in-fact duly authorized. The Trustee may be
removed at any time, at the request of the Bond Insurer, for any breach of the
trust set forth in the Trust Agreement.
Appointment of Successor Trustee.
(a) In case at any time the Trustee shall resign or shall be removed or
shall become incapable of acting, or shall be adjudged as bankrupt or insolvent,
or if a receiver, liquidator or conservator of the Trustee, or of its property,
shall be appointed, or if any public officer shall take charge or control of the
Trustee or of its property or affairs, a successor may be appointed by the
Authority and the Water District.
(b) If in a proper case no appointment of a successor Trustee shall be
made pursuant to the foregoing provisions of the Section within 45 days after
the Trustee shall have given to the Water District and Bond Insurer written
notice as provided in the Trust Agreement or after a vacancy in the office of
the Trustee shall have occurred by reason of its inability to act, the Trustee
may petition at the expense of the Water District a court to appoint a successor
Trustee.
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(c) Any Trustee appointed under the provisions of the Trust Agreement
in succession to the Trustee shall be a commercial bank or trust company or
national banking association, having capital stock and surplus aggregating at
least $75,000,000, acceptable to the Bond Insurer, and authorized to exercise
trust powers.
(d) Notwithstanding any other provision of the Trust Agreement, no
removal, resignation or termination of the Trustee shall take effect until a
successor shall be appointed.
Transfer of Rights and Project to Successor Trustee. Any successor Trustee
appointed under the Trust Agreement shall execute, acknowledge and deliver to
its predecessor Trustee an instrument accepting such appointment, and thereupon
such successor Trustee, without any further act, deed or conveyance, shall
become fully vested with all moneys, estates, properties, rights, powers, duties
and obligations of such predecessor Trustee, with like effect as if originally
named as Trustee; but the Trustee ceasing to act shall nevertheless, on the
written request of the successor Trustee, execute, acknowledge and deliver such
instrument of conveyance and further assurance and do such other things as may
reasonably be required for more fully and certainly vesting and confirming in
such successor Trustee all the right, title and interest of the predecessor
Trustee in and to any property held by it under the Trust Agreement, and shall
pay over, assign and deliver to the successor Trustee any money or other
property subject to the trusts and conditions set forth in the Trust Agreement.
Should any deed, conveyance or instrument in writing from the Water District or
the Authority be required by such successor Trustee for more fully and certainly
vesting in and confirming to such successor Trustee any such estates, rights,
power and duties, any and all such deeds, conveyances and instruments in writing
shall, on request, and so far as may be authorized by law, be executed,
acknowledged and delivered by the Water District or the Authority.
Merger or Consolidation. Any company into which the Trustee may be merged
or converted or with which it may be consolidated or any company resulting from
any merger, conversion or consolidation to which it shall be a party or any
company to which the Trustee may sell or transfer all or substantially all of
its corporate trust business, provided such company shall be a bank or trustee
company organized under the laws of any state of the United States or a national
banking association, shall meet the other requirements of the Trust Agreement,
and shall be authorized by law to perform all the duties imposed upon it by the
Trust Agreement, shall be the successor to the Trustee without the execution or
filing of any paper or the performance of any further act.
Adoption of Authorized Signature. In case any of the Bonds contemplated to
be delivered under the Trust Agreement shall have been executed but not
delivered, any successor Trustee may adopt the authorized signature of any
predecessor Trustee so authenticating such Bonds and deliver such Bonds so
executed; and in case any of the said Bonds shall not have been executed, any
successor Trustee may authenticate such Bonds in the name of the successor
Trustee, and in all such cases such authentication shall have the full force
which it is anywhere in said Bonds or provided that the authentication of the
Trustee shall have.
Liability of the Trustee. The recitals, statements and representations by
the Water District or the Authority contained in the Trust Agreement or in the
Bonds shall be taken and construed as made by and on the part of the Water
District and Authority and not by the Trustee and the Trustee does not assume,
and shall not have, any responsibility or obligations for the correctness of any
thereof.
The Trustee may execute any of the trusts or powers of the Trust Agreement
and perform the duties required of it under the Trust Agreement either directly
or by or through attorneys or agents
C-48
and shall be entitled to advice of counsel concerning all matters of trust and
its duties under the Trust Agreement and shall be absolutely protected in
relying thereon. The Trustee shall not be responsible for the misconduct of such
persons selected by it with reasonable care.
No provision in the Trust Agreement shall require the Trustee to risk or
expend its own funds or otherwise incur any financial liability in the
performance of any of its duties under the Trust Agreement if it shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not assured to it. The Trustee shall
not be liable in connection with the performance of its duties under the Trust
Agreement except for its own negligence or willful misconduct.
In accepting the trust created by the Trust Agreement, the Trustee acts
solely as Trustee for the Owners and not in its individual capacity and all
persons, including without limitation the Owners and the Water District or the
Authority, having any claim against the Trustee arising from the Trust Agreement
shall look only to the funds and accounts held by the Trustee under the Trust
Agreement for payment except as otherwise provided therein. Under no
circumstances shall the Trustee be liable in its individual capacity for the
obligations evidenced by the Bonds.
The Trustee makes no representation or warranty, express or implied as to
the title, value, design, compliance with specifications or legal requirements,
quality, durability, operation, condition, merchantability or fitness for any
particular purpose or fitness for the use contemplated by the Water District or
the Authority of the Project. In no event shall the Trustee be liable for
incidental, indirect, special or consequential damages in connection with or
arising from the Lease Agreement or the Trust Agreement for the existence,
furnishing or use of the Service Contract Project Improvements.
The Trustee shall not be responsible for the sufficiency or enforceability
of the Property Lease or the Lease Agreement or the assignment under the Trust
Agreement of its rights to receive Lease Payments.
The Trustee shall not be deemed to have knowledge of any Event of Default
under the Trust Agreement or under the Lease Agreement unless and until it shall
have actual knowledge thereof.
The Trustee shall not be accountable for the use or application by the
Water District or the Authority or any other party of any funds which the
Trustee has released under the Trust Agreement.
The Trustee shall not be responsible for accounting for, or paying to, any
party to this transaction, including but not limited to the Water District, the
Authority, and the Bondowners, any return on or benefit from funds held for
payment of unredeemed Bonds or outstanding checks and no calculation of the same
shall affect, or result in any offset against, fees due to the Trustee under the
Trust Agreement.
The Trustee's rights to immunities and protection from liability under the
Trust Agreement and its rights to payment of its fees and expenses shall survive
its resignation or removal and the final payment or the defeasance of the Bonds
(or the discharge of the Bonds or the defeasance of the lien of the Trust
Agreement).
C-49
All indemnification and releases from liability granted to the Trustee in
the Trust Agreement or in the Lease Agreement shall extend to the directors,
officers, employees, attorneys and agents of the Trustee.
The Trustee shall have no responsibility, opinion, or liability with
respect to any information, statement or recital in any offering memorandum or
other disclosure material prepared or distributed with respect to the issuance
of the Bonds except for information provided by the Trustee.
Before taking any action under the Trust Agreement at the request of
Owners, the Trustee may require that a satisfactory indemnity bond be furnished
by the Owners for the reimbursement of all expenses to which it may be put and
to protect it against all liability, except liability which is adjudicated to
have resulted from its negligence or willful misconduct in connection with any
action so taken.
AMENDMENTS
Mailing. Any provision in the Trust Agreement for the mailing of a notice
or other paper to Bondowners shall be fully complied with if it is mailed first
class United States mail, postage prepaid only (i) to each Owner of Bonds then
Outstanding at his address, if any, appearing upon the registry books of the
Trustee, and (ii) to the Trustee.
Powers of Amendment. The Trust Agreement and the rights and obligations
provided may be modified or amended at any time by a Supplemental Trust
Agreement, entered into among the Trustee, the Authority and the Water District
but without the consent of any Bondowners, but only (a) to cure any ambiguity,
supply any omission, or cure or correct any defect or inconsistent provision in
the Trust Agreement, (b) to insert such provisions clarifying matters or
questions arising under the Trust Agreement as are necessary or desirable and
are not contrary to or inconsistent with the Trust Agreement as theretofore in
effect, (c) to provide for the authorization, execution and delivery of Parity
Obligations, or (d) in regard to matters arising under the Trust Agreement or
thereunder, as the parties may deem necessary or desirable which shall not in
the opinion of Bond Counsel which may be supported by a certificate of an
independent financial consultant materially adversely affect the interest of the
Bondowners or the Bond Insurer. Any other modification or amendment of the Trust
Agreement and of the rights and obligations of the Trustee or of the Owners of
the Bonds under the Trust Agreement, in any particular, may be made by a
Supplemental Trust Agreement, entered into among the Trustee, the Authority and
the Water District with the written consent, given as provided in the Trust
Agreement, of the Owners of at least sixty percent (60%) in principal amount of
the Bonds Outstanding at the time such consent is given. No such modification or
amendment shall permit a change in the terms of redemption or maturity of the
principal with respect to any Outstanding Bonds or of any installment of
interest with respect thereto or a reduction in the principal amount or the
redemption price with respect thereto or in the rate of interest with respect
thereto or which will have an adverse effect on the security interest of the
Owner without the consent of the Owner of such Bond, or shall reduce the
percentages or otherwise affect the classes of Bonds the consent of the Owners
of which is required to effect any such modification or amendment, or shall
change or modify any of the rights or obligations of the Trustee without the
written assent of the Trustee. The Trustee may in its discretion determine
whether or not, in accordance with the foregoing powers of amendment, Bonds of
any particular maturity would be affected by any modification or amendment of
the Trust Agreement, and any such determination shall be binding and conclusive
on the Authority, the Water District and all Owners of Bonds. The Trustee may
obtain an opinion of counsel that any such Supplemental Trust Agreement entered
into by the Authority, the
C-50
Water District and the Trustee complies with the provisions of the Trust
Agreement and the Trustee may conclusively rely upon such opinion. The Authority
shall be provided with a full original transcript of all proceedings relating to
the execution of any amendatory or Supplemental Trust Agreement or Lease
Agreement. Any provision of the Trust Agreement expressly recognizing or
granting rights in or to Bond Insurer may not be amended in any manner which
affects the rights of Bond Insurer under the Trust Agreement without the prior
written consent of Bond Insurer.
Consent of Bondowners. The Trustee, the Authority and the Water District
may at any time enter into a Supplemental Trust Agreement making a modification
or amendment permitted by the provisions of the Trust Agreement to take effect
when and as provided in the Trust Agreement. A copy of such Supplemental Trust
Agreement (or brief summary thereof), together with a request to Bondowners to
approve the same shall be mailed to each Bondowner (but failure to mail such
copy and request shall not affect the validity of the Supplemental Trust
Agreement when consented to as provided in the Trust Agreement). Such
Supplemental Trust Agreement shall not be effective unless and until (i) there
shall have been filed with the Trustee (a) the written consents of Owners of the
percentage of Outstanding Bonds specified in the Trust Agreement and (b) an
opinion of Bond Counsel stating that such Supplemental Trust Agreement has been
duly and lawfully entered into by the parties thereto and filed with the Water
District and the Trustee in accordance with the provisions of the Trust
Agreement, is authorized or permitted by the Trust Agreement, and is valid and
binding upon the parties thereto in accordance with its terms. Each such consent
shall be effective only if accompanied by proof of the Owner, at the date of
such consent, of the Bonds with respect to which such consent is given, which
proof shall be such as is permitted by the Trust Agreement. The request for
consent of Bondowners pursuant to the Trust Agreement may provide a date by
which such consents must be received to be effective. A certificate or
certificates executed by the Trustee and filed with the Water District stating
that it has examined such proof and that such proof is sufficient in accordance
with the Trust Agreement shall be conclusive that the consents have been given
by the Owners of the Bonds described in such certificate or certificates of the
Trustee. Any such consent shall be binding upon the holder of the Bonds giving
such consent and, anything in the Trust Agreement to the contrary
notwithstanding, upon any subsequent Owner of such Bonds and of any Bonds issued
in exchange therefor (whether or not such subsequent Owner thereof has notice
thereof) unless such consent is revoked in writing by the Owner of such Bonds
giving such consent or a subsequent Owner thereof by filing with the Trustee,
prior to the time when the written statement of the Trustee provided for in the
Trust Agreement is filed. Such revocation and, if such Bonds are held by the
signer of such revocation, proof of ownership shall be evidenced in the manner
permitted by the Trust Agreement. The fact that a consent has not been revoked
may likewise be proved by a certificate of the Trustee filed with the Water
District to the effect that no revocation thereof is on file with the Trustee.
At any time after the Owners of the required percentage of Bonds shall have
filed their consents to the Supplemental Trust Agreement, the Trustee shall make
and file with the Water District a written statement that the Owners of such
required percentage of Bonds have filed such consents. Such written statements
shall be conclusive that such consents have been so filed. At any time
thereafter notice, stating in substance that the Supplemental Trust Agreement
(which may be referred to as a Supplemental Trust Agreement entered into by the
parties thereto on a stated date, a copy of which is on file with the Trustee)
has been consented to by the Owners of the required percentages of Bonds and
will be effective as provided in the Trust Agreement, may be given to Bondowners
by the Water District or the Trustee at the direction of the Water District, by
mailing such notice pursuant to the Trust Agreement to Bondowners (but failure
to receive such notice shall not prevent such Supplemental Trust Agreement from
becoming effective and binding as in the Section provided). The Water District
shall file with the Trustee proof of the mailing of such notice. A record,
consisting of the certificates or statements required or permitted by the Trust
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Agreement to be made by the Trustee, shall be proof of the matters therein
stated. Such Supplemental Trust Agreement making such amendment or modification
shall be deemed conclusively binding upon the Water District, the Trustee, the
Authority and the Owners of all Bonds at the expiration of 40 days after the
filing with the Trustee of the proof of the mailing of such last mentioned
notice, except in the event of a final decree of a court of competent
jurisdiction setting aside such Supplemental Trust Agreement in a legal action
or equitable proceeding for such purpose commenced within such 40 day period;
provided, however, that the Trustee, the Authority or the Water District during
such 40 day period and any such further period during which any such action or
proceeding may be pending shall be entitled in their absolute discretion to take
such action, or to refrain from taking such action, with respect to such
Supplemental Trust Agreement as they may deem expedient. Unless otherwise
provided in the Trust Agreement, Bond Insurer's consent shall be required in
addition to Owner consent, when required, for the following purposes: (i)
execution and delivery of any supplemental Trust Agreement or any amendment,
supplement or change to or modification of the Lease Agreement; (ii) removal of
the Trustee or selection and appointment of any successor trustee; and (iii)
initiation or approval of any action not described in (i) or (ii) above which
requires Owner consent.
Modifications by Unanimous Consent. The terms and provisions of the Trust
Agreement and the rights and obligations of the Trustee and of the Owners of the
Bonds under the Trust Agreement may be modified or amended in any respect upon
entering into by the parties of a Supplemental Trust Agreement with the
unanimous consent of the Owners of all the Bonds then Outstanding and the Bond
Insurer, such consent to be given as provided in the Trust Agreement except that
no notice to Bondowners by mailing shall be provided and to the extent any such
Supplemental Trust Agreement alters the rights and obligations of the Trustee
the Trustee's approval shall be required.
Exclusion of Bonds. Bonds owned or held by or for the account of the Water
District shall not be deemed Outstanding for the purpose of consent or other
action or any calculation of Outstanding Bonds provided for in the Trust
Agreement, and the Water District shall not be entitled with respect to such
Bonds to give any consent or take any other action provided for in the Trust
Agreement. At the time of any consent or other action taken under the Trust
Agreement, the Water District shall furnish the Trustee a Certificate of
Authorized Representative of the Water District, upon which the Trustee may
rely, describing all Bonds so to be excluded.
Notation on Bonds. Bonds issued after the effective date of any action
taken as provided in the Trust Agreement provided may, and if the Water District
so determines shall, bear a notation by endorsement or otherwise in form
approved by the Water District and the Trustee as to such action, and in that
case upon demand of the Owner of any Bond Outstanding at such effective date and
presentation of the Bond or Bonds for the purpose at the principal corporate
trust office of the Trustee or upon any transfer or exchange of any Bond
Outstanding at such effective date, suitable notation shall be made on such Bond
or upon any Bonds issued upon any such transfer or exchange by the Trustee as to
any such action. If the Water District and the Trustee shall so determine, new
Bonds so modified as in the opinion of the Trustee and the Water District may be
necessary to conform to such action shall be prepared, issued, and upon demand
of the Owner of any Bond then Outstanding shall be exchanged, without cost to
such Bondowner, for Bonds of the same maturity then Outstanding, upon surrender
of such Bonds.
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MISCELLANEOUS
Defeasance.
(a) Outstanding Bonds shall be paid and discharged in any one or more
of the following ways -
(i) by paying or causing to be paid the principal of and
interest with respect to said Outstanding Bonds, as and when the same become due
and payable; or
(ii) by depositing with the Trustee, in trust, cash or Investment
Securities of the type set forth in part (A) of the definition thereof in such
amount, including without limitation cash or Investment Securities of the type
set forth in part (A) of the definition thereof then on deposit in the Debt
Service Payment Account and Reserve Account applicable to the Outstanding Bonds,
together with the interest to accrue with respect thereto, as will be
sufficient, as shown on a certificate of a nationally recognized certified
public accountant or firm of certified public accountants, to pay and discharge
the Outstanding Bonds to be paid and discharged (including all principal,
interest and premium, if any) at or before their respective maturity dates.
In the event of a refunding, the Water District shall cause to be
delivered (i) a report of an independent firm of nationally recognized certified
public accountants ("Accountant") verifying the sufficiency of the escrow
established to pay the Bonds in full and (ii) an opinion of nationally
recognized Bond Counsel to the effect that the Bonds are no longer "Outstanding"
under the Trust Agreement, each of which shall be addressed to the Water
District, the Trustee, the Authority and the Bond Insurer.
Notwithstanding that any Bonds shall not have been surrendered for
payment, all obligations of Authority, the Trustee and the Water District under
the Trust Agreement with respect to those Bonds paid, as provided in the above
subsections, and the trust created by the Trust Agreement shall cease and
terminate, except only the obligation of the Trustee to pay or cause to be paid
to the Owner of the Bonds not so surrendered and paid all sums due thereon, to
transfer title to the Water District as provided in the Lease Agreement, and the
obligation of Water District to cause rebates pursuant to the Trust Agreement
and the obligation of the Trustee to make transfers and exchanges of Bonds
pursuant to the Trust Agreement. Notice of defeasance of the Bonds and the
obligations under the Trust Agreement shall be given by the Trustee in the
manner provided in the Trust Agreement. The fees and charges of the Trustee
(including reasonable counsel fees and expenses) must be paid in order to effect
such discharge. The satisfaction and discharge of the Trust Agreement shall be
without prejudice of the rights, if any, of the Trustee to charge and be
reimbursed by the Water District for any expenditures which it may thereafter
incur in connection therewith.
Any funds held by the Trustee, at the time of one of the events described
above, shall have occurred, which are not required for the payment to be made to
Owners, or for payments to be made to the Trustee by the Water District, or for
payment to the United States under the Trust Agreement, shall be paid over to
the Water District.
(b) Anything in the Trust Agreement to the contrary notwithstanding,
any moneys held by the Trustee in trust for the payment of any of the Bonds
which remain unclaimed for two years after the date when such Bonds have become
due and payable, either at their stated maturity dates or by call for earlier
redemption, if such moneys were held by the Trustee at such date,
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or for two years after the date of deposit of such moneys if deposited with the
Trustee after the said date when such Bonds became due and payable, shall be
repaid by the Trustee to the Water District, as its absolute property and free
from trust, and the Trustee shall thereupon be released and discharged with
respect thereto and the Bondowners shall look only to the Water District for the
payment of such Bonds.
(c) Notwithstanding anything in the Trust Agreement to the contrary, in
the event that the principal and/or interest due on the Bonds shall be paid by
Bond Insurer pursuant to the Insurance Policy, the Bonds shall remain
Outstanding for all purposes, not be defeased or otherwise satisfied and not be
considered paid by the Water District or the Authority, and the assignment and
pledge of the Trust Estate and all covenants, agreements and other obligations
of the Water District and the Authority to the registered owners shall continue
to exist and shall run to the benefit of the Bond Insurer and the Bond Insurer
shall be subrogated to the rights of such registered owners.
Evidence of Signatures of Bondowners and Ownership of Bonds.
(a) Any request, consent, revocation of consent or other instrument
which the Trust Agreement may require or permit to be signed and executed by the
Bondowners may be in one or more instruments of similar tenor, and shall be
signed or executed by such Bondowners in person or by their attorneys appointed
in writing. Proof of (i) the execution of any such instrument, or of an
instrument appointing any such attorney, or (ii) the ownership by any person of
the Bonds, shall be sufficient for any purpose under the Trust Agreement (except
as otherwise therein expressly provided) if made in the following manner, or in
any other manner satisfactory to the Trustee, which may nevertheless in its
discretion require further or other proof in cases where it deems the same
desirable: the fact and date of the execution by any Bondowner or his attorney
of such instruments may be proved by a guaranty of the signature thereon by a
commercial bank or trust company or member firm of the New York Stock Exchange
or by the certificate of any notary public or other officer authorized to take
acknowledgments of deeds, that the person signing such request or other
instrument acknowledged to him the execution thereof, or by an affidavit of a
witness of such execution, duly sworn to before such notary public or other
officer. Where such execution is by an officer of a corporation or association
or a member of a partnership, on behalf of such corporation, association or
partnership, such signature guaranty, certificate or affidavit shall also
constitute sufficient proof of his authority.
(b) The ownership of Bonds and the amount, numbers and other
identification, and date of owning the same shall be proved by the registry
books of the Trustee.
Moneys Held for Particular Bonds. The amounts held by the Trustee for the
payment of the interest, principal or premium due on any date with respect to
particular Bonds shall, on and after such date and pending such payment, be set
aside on its books and held in trust by it for the Owners of the Bonds entitled
thereto.
Preservation and Inspection of Documents. All documents received by the
Trustee under the provisions of the Trust Agreement shall be retained in its
possession and shall be subject at all reasonable times to the inspection of the
Water District, the Authority, the Bond Insurer or any Bondowner and their
agents and representatives, any of whom may make copies thereof.
Severability of Invalid Provisions. If any one or more of the covenants or
agreements provided in the Trust Agreement should be contrary to law, then such
covenant or covenants or
C-54
agreement or agreements shall be deemed severable from the remaining covenants
and agreements, and shall in no way affect the validity of the other provisions
thereof.
Recording and Filing. The Water District shall be responsible for the
recording and filing of the Property Lease, Lease Agreement and financing
statements (or continuation statements in connection therewith) or of any
supplemental instruments or documents of further assurance as may be required by
law in order to perfect the security interests created by the Property Lease or
the Lease Agreement. The Water District and the Authority shall take such
further actions as may be necessary to effectuate the transactions contemplated
by the Trust Agreement, the Property Lease and the Lease Agreement.
Payment Procedure Pursuant to the Insurance Policy. As long as the
Insurance Policy shall be in full force and effect, the Authority and the
Trustee agree to comply with the following provisions:
(a) At least one (1) day prior to all Interest Payment Dates the
Trustee will determine whether there will be sufficient funds in the funds and
accounts established under the Trust Agreement for such purpose to pay the
principal of or interest on the Bonds on such Interest Payment Date. If the
Trustee determines that there will be insufficient funds in such Funds or
Accounts, the Trustee shall so notify the Bond Insurer. Such notice shall
specify the amount of the anticipated deficiency as to principal or interest, or
both. If the Trustee has not so notified the Bond Insurer at least one (1) day
prior to the Interest Payment Date, the Bond Insurer will make payments of
principal or interest due on the Bonds on or before the first (1st) day next
following the date on which the Bond Insurer shall have received notice of
nonpayment from the Trustee.
(b) The Trustee shall, after giving notice to the Bond Insurer as
provided in (a) above, make available to the Bond Insurer and, at the Bond
Insurer's direction, to The Bank of New York, in New York, New York, as
insurance trustee for Ambac Assurance or any successor insurance trustee (the
"Insurance Trustee"), the registration books of the Authority maintained by the
Trustee and all records relating to the Funds and Accounts maintained under the
Trust Agreement.
(c) The Trustee shall provide the Bond Insurer and the Insurance
Trustee with a list of registered owners of Bonds entitled to receive principal
or interest payments from the Bond Insurer under the terms of the Insurance
Policy, and shall make arrangements with the Insurance Trustee (i) to mail
checks or drafts to the registered owners of Bonds entitled to receive full or
partial interest payments from the Bond Insurer and (ii) to pay principal upon
Bonds surrendered to the Insurance Trustee by the registered owners of Bonds
entitled to receive full or partial payments from the Bond Insurer.
(d) The Trustee shall, at the time it provides notice to the Bond
Insurer pursuant to (a) above, notify registered owners of Bonds entitled to
receive the payment of principal or interest thereon from the Bond Insurer (i)
as to the fact of such entitlement, (ii) that the Bond Insurer will remit to
them all or a part of the interest payments next coming due upon proof of Owner
entitlement to interest payments and delivery to the Insurance Trustee, in form
satisfactory to the Insurance Trustee, of an appropriate assignment of the
registered owner's right to payment, (iii) that should they be entitled to
receive full payment of principal from the Bond Insurer, they must surrender
their Bonds (along with an appropriate instrument of assignment in form
satisfactory to the Insurance Trustee to permit ownership of such Bonds to be
registered in the name of the Bond Insurer for payment to the Insurance Trustee,
and not the Trustee, and (iv) that should they be entitled to receive
C-55
partial payment of principal from the Bond Insurer they must surrender their
Bonds for payment thereon first to the Trustee who shall note on such Bonds the
portion of the principal paid by the Trustee and then, along with an appropriate
instrument of assignment in form satisfactory to the Insurance Trustee, to the
Insurance Trustee, which will then pay the unpaid portion of principal.
(e) In the event the Trustee has notice any payment of principal of or
interest on Bonds which has become due for payment and which is made to an Owner
by or on behalf of the Authority has been deemed a preferential transfer and
theretofore recovered from its registered owner pursuant to the United States
Bankruptcy Code by a trustee in bankruptcy in accordance with the final,
nonappealable order of a court having competent jurisdiction, the Trustee shall,
at the time the Bond Insurer is notified pursuant to (a) above, notify all
registered owners that in the event that any registered owner's payment is so
recovered, such registered owner will be entitled to payment from the Bond
Insurer to the extent of such recovery if sufficient funds are not otherwise
available, and the Trustee shall furnish to the Bond Insurer its records
evidencing the payments of principal of and interest on the Bonds which have
been made by the Trustee and subsequently recovered form the registered owners
and the dates on which such payments were made.
(f) In addition to those rights granted the Bond Insurer under the
Trust Agreement, the Bond Insurer shall, to the extent it makes payment of
principal of or interest on Bonds, become subrogated to the rights of the
recipients of such payments in accordance with the terms of the Insurance
Policy, and to evidence such subrogation (i) in the case of subrogation as to
claims for past due interest, the Trustee shall note the Bond Insurer's rights
as subrogee on the registration books of the Authority maintained by the Trustee
upon receipt from the Bond Insurer of proof of the payment of interest thereon
to the registered owners of the Bonds and (ii) in the case of subrogation as to
claims for past due principal, the Trustee shall note the Bond Insurer's rights
as subrogee on the registration books of the Authority maintained by the Trustee
upon surrender of the Bonds by the registered owners thereof together with proof
of the payment of principal thereof.
(g) In connection with the issuance of additional Bonds, the Authority
shall deliver to the Bond Insurer a copy of the disclosure document, if any,
circulated with respect to such additional Bonds.
(h) Copies of any amendments made to the documents executed in
connection with the issuance of the Bonds which are consented to by the Bond
Insurer shall be sent to S&P.
(i) The Bond Insurer shall receive notice of the resignation or removal
of the Trustee and the appointment of a successor thereto.
(j) The Bond Insurer shall receive copies of all notices required to be
delivered to the Owners of the Bonds and, on an annual basis, copies of the
Water District's audited financial statements and Annual Budget.
Bond Insurer as Third Party Beneficiary. To the extent that the Trust
Agreement confers upon or gives or grants to the Bond Insurer any right, remedy
or claim under or by reason of the Trust Agreement, the Bond Insurer is
explicitly recognized as being a third-party beneficiary under the Trust
Agreement and may enforce any such right, remedy or claim conferred, given or
granted under the Trust Agreement.
C-56
APPENDIX D
SUMMARY OF CERTAIN PROVISIONS OF THE SERVICE CONTRACT
Set forth below is a summary of the Service Contract between the
Capistrano Valley Water District (the "District") and ECO Resources, Inc. (the
"Company") for the design construction, financing and operation of the San Juan
Basin Desalter Project (the "Service Contract"). This summary is in all respects
subject to and qualified in its entirety by reference to the Service Contract
itself, copies of which are available at the offices of the Capistrano Valley
Water District. Capitalized terms used but not defined in this Appendix D or
elsewhere in the Official Statement shall have the respective meanings set forth
in the Service Contract.
CERTAIN DEFINITIONS
"Applicable Law" means (1) any federal, state or local law, code,
regulation, consent order or agreement; (2) any formally adopted and generally
applicable rule, requirement, determination, standard, policy, implementation
schedule or order of any Governmental Body having appropriate jurisdiction; (3)
any established interpretation of law or regulation utilized by an appropriate
Governmental Body if such interpretation is documented by such regulatory body
and generally applicable; and (4) any Governmental Approval, in each case having
the force of law and applicable from time to time to (a) the siting, permitting,
design, acquisition, construction, equipping, financing, ownership, possession,
start-up, testing, operation, maintenance, repair, replacement or management of
water treatment systems, including the Project; (b) the delivery, treatment,
storage or supply of water; (c) the transfer, handling, transportation or
disposal of Plant By-Products; or (d) any other transaction or matter
contemplated by the Service Contract (including, without limitation, any of the
foregoing which pertain to water treatment, waste disposal, health, safety,
fire, environmental protection, labor relations, building codes, the payment of
prevailing or minimum wages and non-discrimination). Applicable Law shall be
deemed to include the requirements contained in the final mitigated negative
declaration approved by the District in connection with the Project.
"Bankruptcy Code" means the United States Bankruptcy Code, 11 U.S.C. 101
et seq., as amended from time to time and any successor statute thereto.
"Bankruptcy Code" shall also include (1) any similar state law relating to
bankruptcy, insolvency, the rights and remedies of creditors, the appointment of
receivers or the liquidation of companies and estates that are unable to pay
their debts when due, and (2) in the event the Guarantor is incorporated or
otherwise organized under the laws of a jurisdiction other than the United
States, any similar insolvency or bankruptcy code applicable under the laws of
such juris diction.
"Change in Law" means any of the following acts, events or circumstances
to the extent that compliance therewith materially increases the cost of
performing or materially increases the scope of the party's obligations under
the Service Contract:
(a) the adoption, amendment, promulgation, issuance, modification, repeal
or written change in administrative or judicial interpretation of any Applicable
Law on or after the Contract Date, unless such Applicable Law was on or prior to
the Contract Date duly adopted, promulgated, issued or otherwise officially
modified or changed in interpretation, in each case in final form, to become
effective without any further action by any Governmental Body;
(b) the order or judgment of any Governmental Body issued on or after the
Contract Date (unless such order or judgment is issued to enforce compliance
with Applicable Law which was effective as of the Contract Date) to the extent
such order or judgment is not the result of willful or negligent action, error
or omission or lack of reasonable diligence of the Company or of the District,
whichever is asserting the occurrence of a Change in Law; provided, however,
that the contesting in good faith or the failure in good faith to contest any
such order or judgment shall not constitute or be construed as such a willful or
negligent action, error or omission or lack of reasonable diligence;
(c) except with respect to any Governmental Approval required for the
construction of the Project as provided within (b) below pertaining to
exclusions from "Change in Law", the denial of an application for, a delay
D-l
in the review, issuance or renewal of, or the suspension, termination or
interruption of any Governmental Approvals, or the imposition of a term,
condition or requirement which is more stringent or burdensome than the Contract
Standards in connection with the issuance, renewal or failure of issuance or
renewal of, any Governmental Approval to the extent that such occurrence is not
the result of willful or negligent action, error or omission or a lack of
reasonable diligence of the Company or of the District, whichever is asserting
the occurrence of a Change in Law; provided, however, that the contesting in
good faith or the failure in good faith to contest any such occurrence shall not
be construed as such a willful or negligent action or lack of reasonable
diligence; and
(d) any requirements in the mitigated negative declaration finally
approved by the District in connection with the Project which are materially
more burdensome or costly than the requirements contained in the mitigated
negative declaration approved by the District on July 17, 2001.
It is specifically understood, however, that none of the following shall
constitute a "Change in Law":
(a) a change in the nature or severity of the actions typically taken by
a Governmental Body to enforce compliance with Applicable Law which was
effective as of the Contract Date;
(b) acts, events and circumstances with respect to which the Company has
assumed the permitting risk relating to the Project;
(c) any event that affects generally applicable working conditions or
standards that is not specific to the water treatment industry or to the
Project, and that does not require a Capital Modification, other than changes in
federal or State OSHA regulations or minimum wage requirements; and
(d) as and to the extent provided in the Service Contract, the
establishment by a Governmental Body of a minimum staffing level for the
Project.
"Change Order" means a written order to the Company issued and signed by
the District after the Contract Date requiring a change in the Design/Build Work
which is District-directed and not due to an Uncontrollable Circumstance.
"Construction Date" means the first date on which all of the Construction
Date Conditions shall be satisfied or waived, as agreed to in writing by the
parties pursuant to the Service Contract.
"Contract Date" means September 3, 2002.
"Contract Standards" means the standards, terms, conditions, methods,
techniques and practices imposed or required by: (1) Applicable Law; (2) the
Design Requirements; (3) the Performance Guarantees; (4) Good Engineering and
Construction Practice; (5) Good Industry Practice; (6) the Quality Management
Plan; (7) the Operation and Maintenance Manual; (8) applicable equipment
manufacturers' specifications; (9) applicable Insurance Requirements, and (10)
any other standard, term, condition or requirement specifically provided in the
Service Contract to be observed by the Company.
"Contract Year" means the District's fiscal year commencing on July 1 in
any year and ending on June 30 of the following year; provided, however, that
the first Contract Year shall commence on the Acceptance Date and shall end on
the following June 30, and the last Contract Year shall commence on July 1 prior
to the date the Service Contract expires or is terminated, whichever is
appropriate, and shall end on the last day of the Term of the Service Contract
or the effective date of any termination, whichever is appropriate. Any
computation made on the basis of a Contract Year shall be adjusted on a pro rata
basis to take into account any Contract Year of less than 365 or 366 days,
whichever is applicable.
"Design/Build Work" means the employment and furnishing of all labor,
materials, equipment, supplies, tools, scaffolding, transportation, Utilities,
insurance, temporary facilities and other things and services of every kind
whatsoever necessary for the full performance and completion of the Company's
design, engineering, construction, financing, start-up, shakedown, Acceptance
Testing, obtaining Governmental Approvals and related obligations with
D-2
respect to the construction of the Project during the Development Period and the
Construction Period under the Service Contract, including all conpleted
structures, assemblies, fabrications, acquisitions and installations, all
commissioning and testing, and all of the Company's administrative, accounting,
record-keeping, notification and similar responsibilities of every kind
whatsoever under the Service Contract pertaining to such obligations. A
reference to Design/Build Work shall mean any part and all of the Design/Build
Work unless the context otherwise requires, and shall include all Extra
Design/Build Work authorized by Change Order.
"Development Period" means the period from and including the Contract Date
to the Construction Date.
"District Fault" means any breach (including the untruth or breach of any
District representation or warranty set forth in the Service Contract), failure,
non-performance or non-compliance by the District under the Service Contract
with respect to its obligations and responsibilities under the Service Contract
to the extent not attributable to any Uncontrollable Circumstance or Company
Fault, and which materially and adversely affects the Company's rights,
obligations or ability or costs to perform under the Service Contract.
"Extension Period" means the period commencing on the day after the
Scheduled Acceptance Date and ending 547 days following the Scheduled Acceptance
Date, or in the event of one or more delays caused by Uncontrollable
Circumstances, District-requested Change Orders or District Fault occurring
during such period, the date determined by adding to such 547-day period the
aggregate number of days of delay caused by such Uncontrollable Circumstances,
District-requested Change Orders, or District Fault.
"Finished Water" means Raw Water which has been treated at the Plant in
accordance with the Service Contract and delivered by the Company to the
Finished Water Transmission Line.
"Hazardous Material" means any waste, substance, object or material deemed
hazardous under Applicable Law including, without limitation, "hazardous
substances" as defined under CERCLA and "hazardous waste" as defined under RCRA.
"Operation Period" means the period from and including the Provisional
Acceptance Date, to and including the last day of the Term.
"Pre-Existing Environmental Condition" means, and is limited to, (1) the
presence anywhere in, on or under the Project on the Contract Date, if not
disclosed to the Company as of the Contract Date, of underground storage tanks
(for the storage of chemicals or petroleum products), and (2) the presence
anywhere in, on or under the Project, whether or not disclosed to the Company as
of the Contract Date, of Hazardous Materials.
"Project Equipment" means all manufactured equipment, property or assets,
whether or not constituting personal property or fixtures, constituting part of
the Project Improvements including tanks (other than concrete basins, and metal
tanks that exceed 500 gallons capacity), pumps, membrane systems, and water
processing and treatment equipment; instrumentation and control systems; remote
monitoring and communications systems; filtration, disinfection, corrosion
control and water treatment systems; and chemical mixing, metering, storage,
handling and feed systems. Appendix 1 to the Service Contract generally lists
the types of equipment that are expected to be installed in the Project and to
constitute "Project Equipment".
"Project Improvements" means the Plant, the Wells, the Raw Water
Transmission Line, the Booster Pumping Station, the Finished Water Transmission
Line, the Concentrate Disposal Line, and any Capital Modifications made thereto
from time to time. After Acceptance, the Booster Pumping Station shall become
part of the Water System, and shall not be considered part of the Project
Improvements.
"Project Structures" means all structures, buildings, concrete basins and
metal tanks exceeding 500 gallons in capacity, piping and other buried
infrastructure, other than Project Equipment, constituting part of the Project
Improvements. Appendix 1 to the Service Contract generally lists the types of
structures that are expected to be installed in the Project and to constitute
"Project Structures".
D-3
"Specified Site Conditions" means, and is limited to: (1) the presence at
the Project of subsurface structures, materials or conditions having historical,
archaeological, religious or similar significance; (2) the presence at the
Project of functioning subsurface structures used by Utility providers on,
underneath, near or adjacent to the Project if not disclosed to the Company as
of the Contract Date; (3) the presence at the Project of any habitat of an
endangered or protected species as provided in Applicable Law.
"Uncontrollable Circumstance" means any act, event or condition that is
beyond the reasonable control of the party relying thereon as justification for
not performing an obligation or complying with any condition required of such
party under the Service Contract, and that materially interferes with or
materially increases the costs of performing its obligations under the Service
Contract (other than payment obligations) to the extent that such act, event or
condition is not the result of the willful or negligent act, error or omission,
failure to exercise reasonable diligence, or breach of the Service Contract on
the part of such party.
(i) Inclusions. Subject to the foregoing, Uncontrollable Circumstances
shall include, and shall not be limited to, the following:
(a) a Change in Law, except as provided in (l) and (m) of item 2 below;
(b) the existence of a Pre-Existing Environmental Condition;
(c) the existence of a Specified Site Condition;
(d) the treatment of Raw Water having parameters which are outside the
range established by the Design Raw Water Quality Parameters;
(e) contamination of the Project from groundwater, soil or airborne
Hazardous Material migrating from sources outside of the Project and not
caused by Company Fault;
(f) naturally occurring events (except weather conditions normal for
the Service Area) such as landslides, underground movement, earthquakes,
fires, tornadoes, hurricanes, floods, lightning, epidemics and other acts
of God;
(g) explosion, sabotage or similar occurrence, acts of a declared or
undeclared public enemy, extortion, war, blockade or insurrection, riot or
civil disturbance;
(h) labor disputes, except labor disputes involving employees of the
Company, its Affiliates, or Subcontractors which affect the performance of
the Contract Services;
(i) the failure of any Subcontractor (other than the Company, the
Guarantor or any Affiliate of either) to furnish services, materials,
chemicals or equipment on the dates agreed to, but only if such failure is
the result of an event which would constitute an Uncontrollable
Circumstance if it affected the Company directly, and the Company is not
able after exercising all reasonable efforts to timely obtain substitutes;
(j) the failure of any appropriate Governmental Body or private utility
having operational jurisdiction in the area in which the Project is located
to provide and maintain Utilities to the Project which are required for the
performance of the Service Contract, except as provided in paragraph (h) of
item (2) below;
(k) the absence of ownership rights by the District or the City in the
Sites, notwithstanding the representation of the District with respect
thereto in the Service Contract;
(1) except as provided in (k) of item 2 below, the existence of any
right, restriction, servitude, license, easement, right of way, limitation,
qualification, exception, adverse claim, Encumbrance
D-4
or Lien on the Sites which either is unrecorded or not listed as an
exception on the Preliminary Title Reports and which materially and
adversely affects the performance of the Contract Services;
(m) the preemption, confiscation, diversion, destruction or other
interference in possession or performance of materials or services by a
Governmental Body in connection with a public emergency or any condemnation
or other taking by eminent domain of any material portion of the Project;
(n) a violation of Applicable Law by a person other than the affected
party or its Subcontractors;
(o) any Legal Proceeding described the Service Contract, or any order
or decree issued by a court of competent jurisdiction or other Governmental
Body which delays or prevents the construction or operation of the Project,
where such order or decree is not caused by Company Fault;
(p) with respect to the Company, any District Fault or
District-requested Change Orders not due to Company Fault; and
(q) with respect to the District, any Company Fault.
(ii) Exclusions. It is specifically understood that, without
limitation, none of the following acts, events or circumstances shall constitute
Uncontrollable Circumstances:
(a) any act, event or circumstance that would not have occurred if the
affected party had complied with its obligations under the Service
Contract;
(b) changes in interest rates, inflation rates, wage rates, insurance
premiums, commodity prices, currency values, exchange rates or other
general economic conditions;
(c) changes in the financial condition of the District, the Company,
the Guarantor, or their Affiliates or Subcontractors affecting the ability
to perform their respective obligations;
(d) the consequences of error, neglect or omissions by the Company, the
Guarantor, any Subcontractor, any of their Affiliates or any other person
in the performance of the Contract Services;
(e) union or labor work rules, requirements or demands which have the
effect of increasing the number of employees employed at the Project or
otherwise increasing the cost to the Company of performing the Contract
Services;
(f) any and all surface, subsurface and other conditions affecting the
Sites, which may increase cost of performing or cause delay in the
performance of the Design/Build Work, including particularly any subsurface
geotechnical conditions, except those constituting Pre-Existing
Environmental Conditions and Specified Site Conditions;
(g) mechanical failure of equipment to the extent not resulting from a
condition that is listed in the "Inclusions" Section of this definition;
(h) power outages not caused by third-party Utilities or other
Uncontrollable Circumstances;
(i) weather conditions normal for the Service Area;
(j) the existence of any recorded right, restriction, servitude,
license, easement, right of way, limitation, qualification, exception,
adverse claim, Encumbrance or Lien appearing as an exception on the
Preliminary Title Reports;
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(k) failure of the Company to obtain easements, rights of way or
encroachment permits for certain segments of the Sites as indicated in the
Service Contract.
(1) failure of the Company to secure any patent or other intellectual
property right which is or may be necessary for the performance of the
Contract Services;
(m) a Change in Law pertaining to Taxes (except a Change in Law which
imposes a Tax on the private provision of water treatment services, or the
imposition of a Tax on building materials used in the construction of the
Project);
(n) any Change in Law regarding the quality of Finished Water
(including the issuance of any Governmental Approval, the enactment of any
statute, or the promulgation of any regulation) the terms and conditions of
which do not impose more stringent or burdensome requirements on the
Company than are imposed by the Contract Standards; or
(o) except as set forth in the Service Contract, any failure or delay
in obtaining the Construction Governmental Approvals or the CADHS Approval,
or the imposition of any term or condition by a Governmental Body in
connection therewith, which is more burdensome or imposes costs greater
than those assumed by the Company in entering into the Service Contract.
TERM
Initial Term. The Service Contract commenced upon execution and delivery
of the Service Contract (the "Contract Date"), and shall continue in effect for
20 years following the Provisional Acceptance Date (or, if Provisional
Acceptance is not certified by the Company, the Acceptance Date).
District Renewal Option. The Service Contract may be renewed or extended
by mutual agreement of the parties.
OWNERSHIP
Project Ownership. The Sites, and all Project Improvements other than the
Plant, shall be owned by the District or the City at all times. The Plant Site
shall be leased to the Authority pursuant to the Property Lease and the Plant
shall be owned by the Authority, subject to the District's rights provided in
the Lease Agreement.
DESIGN AND CONSTRUCTION OF THE PROJECT
Commencement of Design/Build Work. On the Construction Date, the
Construction Period shall commence and the Company shall promptly proceed to
undertake, perform and complete the Design/Build Work in accordance with the
Contract Standards. The time for completion of the Company's performance of the
Design/Build Work shall be computed from the Construction Date. The Company's
failure to achieve Provisional Acceptance on or before December 4, 2004 shall
result in the assessment of delay liquidated damages described below.
Title and Risk of Loss. Title to the structures, improvements, fixtures,
machinery, equipment and materials constituting the Project shall be in the
Authority, subject to the terms and conditions of the Property Lease and the
Lease Agreement. The Company shall bear all risk of loss concerning such
structures, improvements, fixtures, machinery, equipment and materials until
Acceptance has occurred, regardless of the extent to which the loss was insured
or the availability of insurance proceeds.
Elements of the Design/Build Work. In performing the Design/Build Work
generally, the Company shall, in accordance with the Contract Standards and
without limitation, as and to the extent applicable: (1) prepare and excavate
the Sites; (2) demolish and remove any existing improvements; (3) re-route or
replace any underground Utilities; (4) obtain Governmental Approvals; (5) remove
from the Sites and dispose of any demolition or construction debris resulting
from the Design/Build Work and any unused soil excavated therefrom; (6) design
and
D-6
construct the Project; (7) conduct start up operations; and (8) conduct the
Acceptance Tests, all so that the Project is suitable and adequate for the
purposes thereof.
Warranties. The Company warrants to the District and the Trustee that the
structures, improvements, fixtures, machinery, equipment and materials
incorporated in the Project, and in all Capital Modifications that are
undertaken or made by the Company or its Subcontractor, will be new, of recent
manufacture, of good quality, free from faults and defects, suitable for its
intended purpose and in conformity with the Contract Standards. The Company
shall, for the protection of the District and the Trustee, obtain from all
Subcontractors, vendors, suppliers and other persons from which the Company
procures structures, improvements, fixtures, machinery, equipment and materials
such warranties and guarantees as are normally provided with respect thereto,
each of which shall be assigned to the District to the full extent of the terms
thereof. No such warranty or guarantee shall relieve the Company of any of its
obligations under the Service Contract, and no failure of any warranted
structures, improvements, fixtures, machinery, equipment or material shall be
the cause for any increase in the Service Fee or n on-performance of the
Contract Services unless such failure is itself attributable to an
Uncontrollable Circumstance or District Fault.
Payment of Costs. The Company shall pay directly all costs and expenses
incurred in the performance of the Design/Build Work of any kind or nature
whatsoever, including all costs of permitting (regardless of permittee);
regulatory compliance and Legal Proceedings brought against the Company;
obtaining and maintaining the Security Instruments; payments due under the
construction contract, subcontracts with Subcontractors or otherwise for all
labor and materials; legal, financial, engineering, architectural and other
professional services of the Company; sales, use and similar taxes on building
supplies, materials and equipment; general supervision by the Company of all
Design/Build Work; Company preparation of schedules, budgets and reports;
keeping all construction accounts and cost records; and all other costs required
to achieve Acceptance.
The Company shall pay prevailing wages with respect to the construction
portion of the Design/Build Work in accordance with Section 1720 et seq. of the
California Labor Code.
Company Design. The Company shall have the sole and exclusive
responsibility and liability for the design, construction and performance of the
Project, notwithstanding the Contract Standards or the fact that the RFP for the
Contract Services included certain minimum conceptual design criteria for the
Design/Build Work and certain performance standards that the Project would be
required to meet. The Company shall indemnify, defend and hold harmless the
District and the District Indemnitees from any Loss-and-Expense arising out of
the design, construction or performance of the Project.
Compliance with Applicable Law. In designing, constructing, starting up
and testing the Project, the Company shall comply with Applicable Law, including
all applicable Governmental Approvals, shall construct and operate all equipment
and systems comprising the Project in accordance with the Contract Standards and
applicable equipment manufacturer's specifications and recommendations, and
shall observe the same safety standards as are set forth with respect to the
operation of the Project.
Construction Practice. The Company shall perform the Design/Build Work in
accordance with the Contract Standards and shall have exclusive responsibility
for all construction means, methods, techniques, sequences, and procedures
necessary or desirable for the correct, prompt, and orderly prosecution and
completion of the Design/Build Work as required by the Service Contract. The
Company shall provide, without limitation, the following: temporary power and
light; temporary offices and construction trailers; required design
certifications; required approvals; weather protection; Sites clean-up and
housekeeping; construction trade management; temporary parking; vehicle traffic;
safety and first aid facilities; correction of or compensation for defective
work or equipment; Subcontractors' insurance; storage areas; workshops and
warehouses; temporary fire protection; Sites security; temporary Utilities;
potable water; sanitary services; Subcontractor and vendor qualification;
receipt and unloading of delivered materials and equipment; erection rigging;
temporary supports; and construction coordination.
Independent Engineer. The Company shall cooperate with any Independent
Engineer designated by the Trustee on behalf of the bondholders to assist it in
connection with the oversight of the design and construction of the Project and
the disbursement of Bond proceeds.
D-7
Change Orders and Extra Design/Build Work. The District may issue Change
Orders pertaining to any and all aspects of the Design/Build Work at any time
and for any reason whatsoever, whether and however such Change Orders revise the
Service Contract, add Extra Design/Build Work or omit Design/Build Work or
affect the Scheduled Acceptance Date. Change Orders shall pertain only to
District-directed modifications.
The Company shall not commence performance of any Extra Design/Build Work
without a Change Order authorized by the District. The Company shall be entitled
to additional compensation for Extra Design/Build Work unless required by reason
of any Company Fault. The Fixed Design/Build Price shall be changed if and to
the extent that any Change Order, whether for omitted Design/Build Work or
otherwise, results in any change in the Company's cost of the Design/Build Work.
PROVISIONAL ACCEPTANCE, ACCEPTANCE AND FINAL COMPLETION OF THE PROJECT
Relation of Acceptance to Metropolitan Agreement. The achievement of
Provisional Acceptance, Acceptance and Final Completion are independent measures
of performance by the Company. Provisional Acceptance, Acceptance and Final
Completion may occur on the same or on different dates, as the facts may
warrant. Provisional Acceptance and Acceptance shall be determined without
regard to any provision of the Metropolitan Agreement. The Company shall have
the right to seek to avoid the termination by Metropolitan of the Metropolitan
Agreement by producing Allowable Yield, notwithstanding the requirements
relating to Provisional Acceptance and Acceptance.
Substantial Completion. The Company shall not be permitted to conduct the
Acceptance Tests until Substantial Completion has occurred. Substantial
Completion shall occur only when all of the following conditions have been
satisfied, unless waived by the District: (i) construction of the Project
Improvements in accordance with the Contract Standards has been substantially
completed; (ii) both water treatment process trains are fully operational; (iii)
a preliminary or temporary certificate of occupancy has been issued for the
Project, if required by Applicable Law; (iv) the Company is authorized by all
appropriate Governmental Bodies to perform the procedures necessary to achieve
Acceptance and to conduct the Acceptance Tests under Applicable Law, and such
authorization has not been withdrawn, revoked, superseded, suspended, or
materially impaired or amended; (v) all Utilities specified or required under
the Service Contract to be arranged for by the Company are connected and
functioning properly; (vi) the Company has delivered to the District written
certification from the manufacturers of the reverse osmosis system and the
iron/manganese filters (and from the Company for all other equipment) that such
equipment has been properly installed and tested in accordance with the
manufacturers' recommendations and requirements; (vii) the Company has submitted
to the District and the District has reviewed and approved the plan for
Acceptance Testing; (viii) if required by Applicable Law, the CADHS has approved
the plan for Acceptance Testing and has issued a notice of permission to conduct
the Acceptance Tests; and (ix) the Company has submitted written certification
that all of the foregoing conditions have been satisfied.
Pre-Acceptance Test Raw Water Quality Analysis . The Company shall begin
to conduct a pre-Acceptance Test Raw Water quality analysis at least 120 days
before the earlier of the Scheduled Acceptance Date or the date upon which the
Company plans to begin Acceptance Testing, and complete such analysis and
deliver a final report with respect thereto to the District and the Independent
Engineer within 30 days thereafter. The pre-Acceptance Test Raw Water quality
analysis is to be conducted by the Company for purposes of determining whether
the actual quality of the Raw Water from the Wells is within the Design Raw
Water Quality Parameters as set forth in the Service Contract.
If the pre-Acceptance Test Raw Water quality analysis results indicate
that the Raw Water which was subject to the analysis is not within the Design
Raw Water Quality Parameters, the Company shall provide to the District and the
Independent Engineer, within 15 days after delivery of its final report, an
assessment as to the potential impact of such non-conformity on the Acceptance
Test, Design/Build Price, the Service Fee, Acceptance, and the Performance
Guarantees, together with a discussion of possible Uncontrollable Circumstance
mitigating measures.
Acceptance Date Conditions. The following conditions shall constitute the
"Acceptance Date Conditions," each of which must be satisfied in all material
respects by the Company in order for the Acceptance Date to occur, and each of
which must be and remain satisfied as of the Acceptance Date: (i) each of the
Construction Date
D-8
Conditions shall be and remain satisfied as of the Acceptance Date; (ii) the
Company shall demonstrate that Substantial Completion has occurred; (iii) CADHS
has issued the CADHS Approval, and it is lawful to introduce Finished Water into
the Water System; (iv) all other applicable Governmental Approvals required
under Applicable Law which are necessary for the continued routine operation of
the Project shall have been duly obtained by the Company and shall be in full
force and effect; (v) the Company shall have completed all required Acceptance
Tests and such tests shall have demonstrated that the Project has met the
Acceptance Test Procedures and Standards; and (vi) there shall be no Event of
Default by the Company under the Service Contract or by the Guarantor under the
Service Contract Guaranty Agreement, or event which with the giving of notice or
the passage of time would constitute an Event of Default by the Company under
the Service Contract or an Event of Default by the Guarantor under the Service
Contract Guaranty Agreement.
Provisional Acceptance. The Company shall have the right, following the
conduct of the Acceptance Tests and the delivery of the Acceptance Test report,
to certify Acceptance on a provisional basis. In order to certify Acceptance on
a provisional basis, the Company shall deliver a written certification to the
District and the Independent Engineer that, in the good faith judgment of the
Company based on all information available to it at the time of the
certification, all of the Acceptance Date Conditions have occurred. The date
upon which the Company's provisional Acceptance certification is delivered is
referred to as the "Provisional Acceptance Date," and thereupon "Provisional
Acceptance" shall be deemed to have occurred.
Upon the occurrence of Provisional Acceptance, the Operation Period shall
commence and all of the Operation Period rights and obligations of the parties
shall apply on a permanent basis (including the Performance Guarantees of the
Company, the Service Fee payment obligations of the District, and the obligation
of the Company to pay liquidated damages for any failure to meet the Performance
Guarantees). The Initial Term of the Service Contract shall commence on the
Provisional Acceptance Date, and thereafter the parties shall be bound as if
Acceptance had permanently occurred, unless the District disputes the Company's
Provisional Acceptance certification.
Daily Liquidated Damages. In the event that Provisional Acceptance (or, if
Provisional Acceptance is not certified by the Company, Acceptance) occurs prior
to December 4, 2004, the Company shall have no obligation to pay delay
liquidated damages. The Company shall, however, following the Provisional
Acceptance Date (or, if Provisional Acceptance is not certified by the Company,
the Acceptance Date), be responsible for all performance-related damages and
liquidated damages provided for in the Service Contract during the Operation
Period.
In the event that Provisional Acceptance (or, if Provisional Acceptance is
not certified by the Company, Acceptance) occurs subsequent to December 4, 2004,
the Company shall pay to the District daily delay liquidated damages for each
day that the Provisional Acceptance Date (or, if Provisional Acceptance is not
certified by the Company, the Acceptance Date) falls after December 4, 2004 in
an amount equal to the Lease Payments (including payments with respect to both
interest and principal) accrued by the District on a daily basis, up to the end
of the Extension Period and thereafter until any termination of the Service
Contract for an Event of Default by the Company. The accrual of such Lease
Payments shall be determined on the basis of the amount of the Lease Payments
actually payable to the Issuer under the Lease Agreement, whether such payments
are in fact made by the District directly or from proceeds of the Bonds borrowed
in order to capitalize interest. Such damages shall be payable on the first day
of each month and, upon any such termination, the date of termination, and shall
be secured by the Service Contract Letter of Credit.
Concurrence or Disagreement With Test Results. If the District states in
writing that the District and the Independent Engineer concur with the Company's
certification of Provisional Acceptance, the Project shall be deemed to have
achieved Acceptance and the Acceptance Date shall be deemed to have been
established on a permanent basis as of the Provisional Acceptance Date.
The District may determine at any time within 60 days of the Company's
certification of Provisional Acceptance that it does not concur with the
Company's certification. In the event of any such non-concurrence by the
District, either party may elect to refer the dispute to Non-Binding Mediation
for resolution. In the event that the Mediator fails to issue a decision within
60 days, then either party may initiate judicial proceedings. The parties
acknowledge and agree that any decision rendered by the Mediator as to whether
Acceptance has occurred shall be non-binding. Acceptance shall not be deemed to
have been achieved unless the Acceptance Test, conducted in a
D-9
unified and continuous manner as provided in the Acceptance Test plan,
demonstrates that all of the Acceptance Test Procedures and Standards have been
met. No disagreement as to the achievement of Acceptance shall prevent the
Company from operating the Project so as to produce Allowable Yield and avoid
the automatic termination of the Metropolitan Agreement.
Scheduled Acceptance Date. The Scheduled Acceptance Date shall be
September 1, 2004. In the event one or more delays in the Design/Build Work
caused by Uncontrollable Circumstances, District-requested Change Orders or
District Fault occur during the Construction Period, the Scheduled Acceptance
Date shall not be September 1, 2004, but shall be the date determined by adding
to September 1, 2004 the aggregate number of days of delay in the performance of
the Design/Build Work by the Company caused by such Uncontrollable
Circumstances, District-requested Change Orders, and District Fault. In the
event of any such adjustment, delay liquidated damages payable by the Company,
if any, shall be payable from the adjusted Scheduled Acceptance Date and not
from September 1, 2004.
Effect of Unexcused Delay - Metropolitan Agreement. The Company
acknowledges that the Final GRP Contribution payment required to be made by
Metropolitan under the Metropolitan Agreement to the District constitutes a
material inducement for the District to undertake the Project through the
Service Contract, and that the Metropolitan Agreement is subject to automatic
termination if construction has not commenced by December 4, 2002 or if no
Allowable Yield is produced by December 4, 2004.
In the event (1) the Metropolitan Agreement terminates under paragraphs
(b) or (c) of Section 9.4 thereof, and (2) such termination is the result of a
failure to commence construction or a failure to produce Allowable Yield that is
not caused by the occurrence of an Uncontrollable Circumstance or District
Fault, the Company shall pay the District for each Contract Year during the Term
of the Service Contract, as liquidated damages for such failure, an amount
calculated as follows:
LD = AWD x FC
where,
AWD = The total number of acre feet of Finished
Water actually demanded by the District in
such Contract Year pursuant to its demand
rights.
FC = The amount, expressed in dollars per acre
foot, which the Final GRP Contribution would
have been in such Contract Year had the
Metropolitan Agreement not been terminated.
The liquidated damages shall be applied as a credit to reduce the Service Fee
payment due in the applicable Contract Year, and shall be paid in cash to the
extent it exceeds such Service Fee payment.
Effect of Unexcused Delay - Extension Period. If Acceptance shall not have
occurred on or before the Scheduled Acceptance Date, the Company shall be
entitled to continue to seek to achieve Acceptance during the Extension Period.
If, as of the last day of the Extension Period, the Acceptance Tests have not
been conducted or have failed to demonstrate that Acceptance has been achieved,
an Event of Default by the Company will be deemed to have occurred
notwithstanding any absence of notice, further cure opportunity or other
procedural rights accorded the Company, and the District shall thereupon have
the right to terminate the Service Contract for cause upon written notice to the
Company and the Trustee.
Final Completion. The Company shall achieve Final Completion within 180
days after the Acceptance Date. "Final Completion" shall occur when all of the
following conditions have been satisfied: (i) a certificate of occupancy has
been issued for the Project, if required; (ii) the Acceptance Test has been
conducted, the Acceptance Test Procedures and Standards have been achieved, and
Acceptance has occurred; (iii) all applicable Design/Build Work (including all
items on the Final Punch List and all clean up and removal of construction
materials and demolition debris) is complete and in all respects is in
compliance with the Service Contract, and there are no
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outstanding legally valid "stop notices"; (iv) the District has approved in
writing, such approval not to be unreasonably withheld, the certification by the
Company that all Design/Build Work pertaining to the Project has been completed
to the level reasonably required under Good Engineering and Construction
Practice and under Applicable Law in order to conduct the Acceptance Tests, and
that such Design/Build Work is in all respects in compliance with the Design
Requirements; (v) the Company has delivered to the District the final Operation
and Maintenance Manual; (vi) the Company has submitted to the District
certificates of insurance for all Required Operation Period Insurance; (vii) the
Company has furnished to the District all Deliverable Material required to be
delivered prior to Acceptance; (viii) the Company shall have delivered to the
District a final and complete reproducible set of record drawings and shall
certify that the Project was constructed in accordance with the Design
Requirements, including any Change Orders; and (ix) the Company shall be in
possession of, and shall have delivered to the District, copies of the
warranties of machinery, equipment, fixtures and rolling stock constituting a
part of the Project, together with copies of all related operating manuals
supplied by the equipment supplier.
DESIGN/BUILD PRICE; PAYMENT OF THE DESIGN/BUILD PRICE
Design/Build Price Generally. The District shall pay the Company the
Design/Build Price for the Design/Build Work. Payments shall be made on a
milestone basis from the proceeds of the Bonds held by the Trustee based on
requisitions for payment submitted by the Company to the Trustee and approved by
the Independent Engineer. The Fixed Design/Build Price shall be the sum of the
Fixed Design/Build Price and the Fixed Design/Build Price Adjustments.
Fixed Design/Build Price. The Fixed Design/Build Price is $25,030,607;
provided, however, that in the event the District makes an election to require
the use of pile driving for the construction of the Plant foundation, the Fixed
Design/Build Price shall be $24,190,607.
Fixed Design/Build Price Adjustments. The following items shall constitute
the Fixed Design/Build Price Adjustments: (i) an adjustment for the cost of any
Change Orders issued by the District, it being agreed by the parties that only
the District is entitled to issue Change Orders; (ii) an adjustment for the cost
of any modifications to the Design/Build Work required by Uncontrollable
Circumstances; and (3) an adjustment for certain San Diego Gas and Electric
interconnection costs.
In the event the cost paid by the Company on an upfront basis for
interconnecting with the San Diego Gas and Electric utility system for the
supply of electric power to the Project exceeds $50,000, there shall be a Fixed
Design/Build Price Adjustment equal to (1) 25% of the amount of such excess over
$50,000 and under $100,000; and (2) 50% of the amount of such excess over
$100,000. There shall be no-mark-up by the Company on San Diego Gas and
Electric's interconnection cost. If the cost of the San Diego Gas and Electric
interconnection is in part or in whole paid over time through electric rates,
the District shall pay such electric rates, and the Company shall reimburse the
District (on a reasonably estimated one-time basis) with respect to such
electric rates so as to bear the same portion of the cost of the interconnection
that it would have borne had the cost been paid on an upfront basis.
The Company agrees that the Design/Build Price shall be the Company's
entire compensation and reimbursement for the performance of the Design/Build
Work, including obtaining all Utilities that the Company will require to perform
the Design/Build Work, starting up the Project, and operating the Project during
the Acceptance Test. In no event shall the Company be entitled to any payment
for Design/Build Work costs in excess of the Design/Build Price notwithstanding
any cost overruns the Company may incur. The Company shall finance and pay for
any such excess costs in any manner it chooses without reimbursement from or
other claim upon the District or the Trustee.
Payment of the Design/Build Price. The milestone payment schedule of the
Service Contract sets forth the milestone payments to be made with respect to
the Design/Build Work, and the sum of all such milestone payments equals the
Fixed Design/Build Price. Following the Construction Date, the Company shall be
entitled to submit Requisitions on a monthly basis and receive from the Trustee
on behalf of the District the milestone payments against the Fixed Design/Build
Price, which: (1) shall be made only upon achievement of the milestone required
to be achieved as the basis for such payment as set forth in the milestone
payment schedule, as achievement shall be determined and certified to the
Trustee by the Independent Engineer; and (2) shall be subject to the conditions
of payment set forth in the Service Contract.
D-ll
Retainage. Each progress payment will be subject to a 10% retainage
holdback. Interest earned on the retainage holdback shall remain in the
Trustee's construction fund for disbursement in accordance with the Trust
Agreement and the Service Contract. The Trustee shall release to the Company the
accumulated funds (without interest) so retained with respect to the
Design/Build Work upon receipt of (1) certification from the Company and
confirmation by the Independent Engineer that Final Completion of the
Design/Build Work has occurred and (2) the Trustee's receipt of written
concurrence from the District that Final Completion of the Design/Build Work has
occurred.
Permissible Withholdings. The Trustee may disapprove and withhold and
retain all or any portion of any payment requested in any Requisition in an
amount equal to the sum of: (1) any amounts which are permitted under the
Service Contract to be withheld from any payment requested in any Requisition;
(2) any delay liquidated damages payable; (3) any indemnification or other
amounts which are due and owing to the Trustee or the District under any
provision of the Service Contract; provided, however, that the Trustee shall not
disapprove, withhold or retain any amounts in respect of funds owed to the
District by the Company unless the District made a written request therefor to
the Trustee and has submitted to the Trustee reasonably detailed documentation
evidencing the District's immediate entitlement to the funds that the District
has requested the Trustee to disapprove, withhold and retain and the basis for
such entitlement; (4) any deductions which are required by Applicable Law; (5)
an amount equal to the cost to the District of performing any work in the event
of a failure by the Company or any Subcontractor to timely perform its
obligations under the warranties given; (6) any payments with respect to which
the Design/Build Work covered by such Requisition (or any previous Requisition)
does not comply with the Service Contract; (7) any payments for Design/Build
Work with respect to which any person has recorded a Lien or Encumbrance
resulting from the acts or omissions of the Company in performing the
Design/Build Work, where such Lien or Encumbrance remains unreleased, unbonded
or undischarged; and (8) all requisitioned payments, if an Event of Default of
the Company has occurred.
OPERATION AND MANAGEMENT
Operation and Management Responsibility. Commencing on the Provisional
Acceptance Date (or, if Provisional Acceptance is not certified by the Company,
Acceptance), the Company shall operate and manage the Project on a 24-hour per
day, 7-day per week basis, and shall treat Raw Water, produce and supply
Finished Water, transport and dispose of Plant By-Products and operating wastes,
provide all information necessary to secure Governmental Approvals, and
otherwise operate and manage the Project so as to comply with the Contract
Standards applicable to such activities, each of the plans pertaining thereto
set forth in the Appendices to the Service Contract, and the other terms and
conditions of the Service Contract.
District Obligations. The District, in addition to the obligations it has
accepted elsewhere in the Service Contract, shall: (1) make available to the
Company upon request all information relating to the Project which is in the
possession of the District and material to the Company's performance of the
Contract Services; (2) grant and assure the Company access to the Project for
the performance of its obligations under the Service Contract; (3) maintain and
repair in good working order all Water System assets which are not included in
the Project (including, after Acceptance, the Booster Pumping Station); and (4)
pay the Service Fee and any other amounts due the Company in accordance with the
terms and conditions of the Service Contract.
Electricity Supply, Payment and Utilization. The District shall have the
exclusive right to arrange for the supply of electricity to the Project, and to
negotiate and establish electric rates with the supplier. The Company shall
cooperate with and assist the District in making such arrangements, and the
District shall give reasonable consideration to any requests and recommendations
made by the Company as to the terms and conditions of electricity supply. The
District shall pay all electricity bills. The Company guarantees that
electricity usage and demand shall not exceed the levels established under the
Guaranteed Maximum Electricity Utilization. In the event that electricity usage
or demand exceeds such levels for reasons other than Uncontrollable
Circumstances or District Fault, the Company shall pay or credit to the District
an amount equal to the portion of the electric bill paid by the District which
is attributable to such excess; provided, however that the Company shall have no
obligation to make such payment or credit if and to the extent that such payment
would not reduce the Effective Rate for Finished Water. In the event that
electricity usage or demand is less than the levels established under the
Guaranteed Maximum Electricity Utilization, the District shall pay the Company
the electricity savings element of the Service Fee; provided, however, that the
District shall be obligated to pay such electricity savings element only if and
to the
D-12
extent that the savings shall reduce the Effective Rate for Finished Water. The
Company shall operate the Project in a manner which minimizes, to the maximum
extent reasonably practicable in light of its obligation to provide the Contract
Services, charges to the District for electricity use, demand, transmission and
distribution.
Compliance with Metropolitan Agreement. The Company shall perform all of
the District's obligations under the Metropolitan Agreement, including the
reporting obligations of the District, notwithstanding the fact that the Company
is not a party to the Metropolitan Agreement. In the event the Metropolitan
Agreement is terminated due to a failure of the Company to comply with its
obligations under the Service Contract, and such failure is not caused by an
Uncontrollable Circumstance, District-directed Change Order or District Fault,
the Company shall pay the District for each remaining Contract Year or portion
thereof during the Term of the Service Contract, liquidated damages in the
amounts specified in the Service Contract.
The District shall not amend the Metropolitan Agreement in a manner that
materially and adversely affects the Company without the consent of the Company.
In the event Metropolitan agrees to amendments to or interpretations of the
Metropolitan Agreement that are favorable to the District, or agrees to
reinstate the Metropolitan Agreement following its termination, or agrees to
forebear in the enforcement of any of the terms thereof, the Company shall have
the benefit of any such amendment, interpretation, reinstatement or forebearance
with respect to its obligations under the Service Contract.
Compliance with Applicable Law. The Company shall perform the Contract
Services in accordance with Applicable Law, and shall cause all Subcontractors
to comply with Applicable Law. The Company shall comply with the terms of all
Governmental Approvals and other Applicable Law pertaining to the Project, Raw
Water and Finished Water, notwithstanding the fact that the Company may not be a
permittee or co-permittee to some of the Governmental Approvals.
The Company shall perform and provide all sampling, laboratory testing and
analyses, and quality assurance and quality control procedures and programs
required by the Contract Standards. All testing laboratories shall be CADHS and
EPA, as applicable, certified for the applicable test. All sampling and test
data shall be available for review by, and reported to, the District. The
Company explicitly assumes the risk of incorrect sampling, testing and
laboratory work and any consequences thereof or actions taken or corrections
needed based thereon, whether such work is performed by itself or third parties,
both as to failures to detect and as to false detections. The Company shall
permit the District, at the District's expense, to perform any testing, sampling
or analytical procedure it deems appropriate, using the Project or otherwise.
In connection with any actual or alleged event of non-compliance with
Applicable Law, the Company shall, in addition to any other duties which
Applicable Law may impose: (1) fully and promptly respond to all inquiries,
investigations, inspections, and examinations undertaken by any Governmental
Body; (2) attend all meetings and hearings required by any Governmental Body;
(3) provide all corrective action plans, reports, submittals and documentation
required by any Governmental Body; (4) in conjunction with the District,
communicate in a timely and effective manner with the general public as to the
nature of the event, the impact on the public, and the nature and timetable for
the planned remediation measures; and (5) immediately upon receipt thereof,
provide the District with a true, correct and complete copy of any written
notice of violation or non-compliance with Applicable Law, and true and accurate
transcripts of any verbal notice of non-compliance with Applicable Law, issued
or given by any Governmental Body. The Company shall furnish the District with
an immediate written notice describing the occurrence of any event or the
existence of any circumstance which does or may result in any such notice of
violation or non-compliance to the extent the Company has knowledge of any such
event or circumstance, and of any Legal Proceeding alleging such non-compliance.
Except to the extent excused by Uncontrollable Circumstances or District
Fault, in the event that the Company or any Subcontractor fails at any time to
comply with Applicable Law with respect to the Project, Raw Water, Finished
Water, air emissions, odor, Residuals or other environmental or operating
conditions, the Company shall, without limiting any other remedy available to
the District upon such an occurrence and notwithstanding any other provision of
the Service Contract: (1) immediately correct such failure and resume compliance
with Applicable Law; (2) bear all Loss-and-Expense of the Company and indemnify
and hold harmless the District from any Loss and Expense resulting therefrom;
(3) pay or reimburse the District for any resulting damages, fines, assessments,
levies, impositions, penalties or other charges; (4) make all Capital
Modifications and changes in
D-13
operating and management practices which are necessary to assure that the
failure of compliance with Applicable Law will not recur; and (5) comply with
any corrective action plan filed with or mandated by any Governmental Body in
order to remedy a failure of the Company to comply with Applicable Law.
The Company shall keep the Project neat, clean and litter-free at all
times, ensure that the operation of the Project does not create any odor,
litter, noise, fugitive dust, vector, excessive light or other adverse
environmental effects constituting, with respect to each of the foregoing, a
nuisance condition under Applicable Law. Should any such nuisance condition
occur which is not caused by Uncontrollable Circumstances, the Company shall
immediately remedy the condition, pay any fines or penalties relating thereto,
make all Capital Modifications and changes in operating and management practices
necessary to prevent a recurrence of the nuisance condition, and indemnify and
hold harmless the District from any Loss-and Expense relating thereto.
Operating Governmental Approvals. The Company shall make all filings,
applications and reports necessary to obtain and maintain all Governmental
Approvals required to be made, obtained or maintained by or in the name of the
Company or the District under Applicable Law in order to operate the Project.
With respect to Governmental Approvals which are required to be obtained in the
name of the District, the Company shall: (1) prepare the application and develop
and furnish all necessary supporting material; (2) supply all data and
information which may be required; (3) familiarize itself with the terms and
conditions of such Governmental Approvals; (4) attend all required meetings and
hearings; and (5) take all other action necessary in obtaining, maintaining,
renewing, extending and complying with the terms of such Governmental Approvals.
Except as set forth elsewhere in the Service Contract, permit and filing fees
required in order to obtain and maintain Governmental Approvals for the Contract
Services shall be paid by the Company, regardless of the identity of the
applicant, except Governmental Approvals required in connection with an
Uncontrollable Circumstance. The Company shall agree to be named as a
co-permittee on any Governmental Approval if so required by the issuing
Governmental Body. The Company shall not knowingly disadvantage the District in
any application, data submittal or other communication with any Governmental
Body regarding Governmental Approvals. The final terms and conditions of any
Governmental Approval shall be subject to the District's approval.
All data, information and action required to be supplied or taken in
connection with the Governmental Approvals required for the Contract Services
shall be supplied and taken on a timely basis considering the requirements of
Applicable Law and the responsibilities of the District as the beneficial owner
of the Project and primary permittee. The data and information supplied by the
Company to the District and all regulatory agencies in connection therewith
shall be correct and complete in all material respects, and shall be submitted
in draft form to the District sufficiently in advance to allow full and
meaningful review and comment by the District. To the extent that a Change in
Law subsequent to the Contract Date requires additional information or data to
be supplied for Governmental Approvals, the Company shall be reimbursed for the
reasonable additional costs incurred by the Company to collect, develop and
provide such data. The Company shall be responsible for any schedule and cost
consequences which may result from the submission of materially incorrect or
incomplete information. The District reserves the right to reject, modify,
alter, amend, delete or supplement any information supplied by the Company in
connection with the Governmental Approvals required for the Contract Services.
The District shall pay the costs of collecting, developing and providing any
additional data and information which must be supplied to a Governmental Body
for a Governmental Approval as the result of any Change in Law.
The Company shall report to the District, immediately upon obtaining
knowledge thereof, all violations of the terms and conditions of any
Governmental Approval or Applicable Law pertaining to the Project. The unexcused
failure of the Company to comply with any Governmental Approval shall constitute
a breach of the Service Contract as well as an event of non-compliance with the
Governmental Approval and shall, with respect to unexcused failures to comply
with water quality standards, obligate the Company to pay liquidated damages as
and to the extent provided in the Service Contract.
PERFORMANCE
Water System. The Company acknowledges that the Project will constitute a
primary component of the Water System and that the District, in meeting the
water supply requirements of the Service Area, is providing an essential public
service, and in complying with Applicable Law, will rely on the performance by
the Company of its obligations under the Service Contract.
D-14
Except for the property and facilities delineated in the Service Contract
as being subject to the management responsibility of the Company, the District
has and shall retain full management responsibility for the Water System.
The Company shall manage the Project in a manner which serves and
complements the requirements of the Water System and in accordance herewith, and
agrees that no provision of the Service Contract shall confer upon the Company
any right the exercise of which may adversely affect the Water System or the
ability of the District to operate the Water System in a manner which serves the
water needs of the Service Area in compliance with Applicable Law.
Water Treatment Guarantee. Except to the extent relieved by Uncontrollable
Circumstances or District Fault, the Company shall operate the Project on a
continuous 24-hour per day, 7-day per week basis so as to treat Raw Water and to
produce and distribute Finished Water to the Water System in compliance with the
requirements of Applicable Law. In addition to its obligations to comply with
the Finished Water requirements imposed by Applicable Law and except to the
extent relieved for Uncontrollable Circumstances or District Fault, the Company
shall treat Raw Water and produce and distribute Finished Water in compliance
with the contract requirements set forth in the Service Contract (the "Enhanced
Standards"), except that with respect to the certain Enhanced Standards relating
to flavor and aroma, the Company shall be obligated only to use its best
reasonable efforts to achieve such Enhanced Standards.
Except to the extent relieved for Uncontrollable Circumstances or District
Fault, the Company shall pay liquidated damages in the amounts set forth in the
Service Contract (which amounts shall not be subject to escalation) for the
Company's failure to comply with certain Water Treatment Guarantee parameters.
These liquidated damages have been established to address minor, occasional
exceedences of the applicable regulatory standards and the Enhanced Standards.
Major or repeated unexcused failures of compliance with the Water Treatment
Guarantee are not intended to be events of non-compliance as to which liquidated
damages apply, but instead shall be deemed to be breaches of the Service
Contract, as to which the District may seek actual damages and exercise its
other remedies under the Service Contract. The District shall have no right of
termination except pursuant to an Event of Default by the Company upon the
occurrence of a material breach. If any such unexcused failure by the Company to
comply with the Water Treatment Guarantee results in a requirement that a "boil
water" or other public notice be issued, or results in a significant regulatory
enforcement action by a Governmental Body, the nature and extent of the
unexcused non-compliance and of the resulting public notice or regulatory
enforcement action shall be taken into account in determining the level of
actual damages and establishing any other remedies which are appropriate to the
breach.
The Water Treatment Guarantee shall apply, except to the extent excused by
Uncontrollable Circumstances or District Fault, (1) without any allowance for
scheduled or unscheduled downtime or Plant maintenance, repair or replacement,
which the Company acknowledges has been factored into the Water Treatment
Guarantee, and (2) so long as the actual Raw Water supply conditions are in
conformity with the Design Raw Water Quality Parameters. In the event and for
any period during which the actual Raw Water supply conditions are not in
conformity with the Design Raw Water Quality Parameters, the Company shall use
its best reasonable efforts to comply with the Water Treatment Guarantee during
the period of non-conformity.
In the event that any Finished Water supplied to the Water System fails to
comply with the Water Treatment Guarantee and the Service Contract, except to
the extent such failure of compliance is caused by an Uncontrollable
Circumstance or District Fault, the Company shall indemnify, defend and hold
harmless the District and the District Indemnities from the Loss-and-Expense of
any tort, environmental, contract or other liability resulting in any Legal
Proceeding originated by any third party arising from the supply of such
non-complying Finished Water. This indemnity shall extend to any liability
resulting from property loss or damage or death or personal injury suffered or
alleged to be suffered by any person from exposure to or as a result of using or
consuming such non-complying Finished Water based on any theory of recovery,
including theories of product liability, toxic tort or environirental
impairment. The Loss-and-Expense to which the indemnity extends shall not be
construed to constitute consequential or other damages, as to which both parties
have waived any rights of recovery.
The parties acknowledge that a Change in Law may affect Finished Water
standards or impose more stringent requirements relating to equipment or
processes than those established as of December 31, 2001. In the
D-15
event a Change in Law occurs, the Company shall not be entitled to performance
relief or additional compensation unless: (1) such Change in Law imposes a
regulatory standard or operating requirement with respect to any particular
Finished Water characteristic or parameter which is more stringent or burdensome
to comply with than the Contract Standards applicable to such characteristic or
parameter, or requires equipment or processes not then in place or practiced at
the Project; and (2) the Company is unable, after taking all reasonable
mitigation measures required under the Service Contract with respect to such a
Change in Law, to avoid the necessity for such performance relief or additional
compensation.
Water Delivery Guarantee. Except with respect to permitted scheduled and
unscheduled Plant downtime and except as the Company's obligations may be
limited upon the occurrence of an Uncontrollable Circumstance or District Fault,
the District shall have the right throughout the Operation Period to demand the
delivery of Finished Water to the Finished Water Transmission Line at Flow Rates
of 5.14, 2.57 or 0 MGD reflecting two-train or single train operation, or full
shut down. The Company shall use its best efforts, within the physical capacity
of the Plant, to meet the District's demand for the delivery of Finished Water
in accordance with the provisions of the Service Contract.
The "Firm Daily Water Demand Volume", for purposes of the Service
Contract, shall be the volume of Finished Water demanded by the District based
on the Flow Rates specified in the "day-before" firm Finished Water demand
schedules furnished by the District, as adjusted by any "day-of" modifications
thereto. Except to the extent excused by Uncontrollable Circumstances or
District Fault and except as adjusted pursuant to the Service Contract, the
Company shall operate the Project so as to deliver Finished Water to the
District each day during the Operation Period in volumes at least equal to the
Firm Daily Water Demand Volume with respect to such day (the "Water Delivery
Guarantee").
The Company may not deliver Finished Water to the District on any day
during the months of December, January, February and March, in a volume which is
greater than the Firm Daily Water Demand Volume established by the District with
respect to such day. The Company may, however, during the months of April
through November, deliver Finished Water to the District on any day in a volume
up to 5% more (or up to 9% more, subject to District approval) than the Firm
Daily Water Demand Volume established by the District with respect to such day,
but subject to a maximum overall limit of 5,231 acre feet per Contract Year. The
purpose of the Company's surplus delivery rights is to give the Company an
opportunity to mitigate any daily delivery shortfalls occurring in a Contract
Year. The Company shall not be entitled to any additional compensation for any
such surplus daily deliveries. The Company shall have the right to apply surplus
water deliveries achieved in the first 60 days of any Contract Year against
Finished Water delivery shortfalls occurring in the last 60 days of the
preceding Contract Year, so as to reduce any liquidated damages that may be
payable pursuant to the Water Delivery Guarantee.
If, in any Contract Year, (1) the cumulative amount of any Finished Water
delivery shortfalls under the Water Delivery Guarantee exceeds (2) the
cumulative amount of any permissible surplus Finished Water deliveries, the
Company shall pay liquidated damages to the District, for each acre foot of such
Finished Water delivery shortfalls, in an amount equal to the sum of (1)
Metropolitan's Prevailing Full Service Treated Water Rate (expressed in dollars
per acre foot) plus, (2) the Final GRP Contribution with respect to such
Contract Year (expressed in dollars per acre foot), plus (3) the administrative
and operation and maintenance charge (expressed in dollars per acre foot)
imposed by MWDOC on the District with respect to such Contract Year (exclusive
of any elements thereof which are attributable to services provided by MWDOC
which are substantially different in scope or quantity than the services
historically provided by MWDOC to the District prior to the Contract Date);
provided, however, that the amount described in item (2) shall not be payable if
the Metropolitan Agreement has been terminated and the Company has paid
liquidated damages as a result.
Extraordinary Flow Rate Change. The District shall have the right at any
time during which the Plant is not shut down for scheduled or unscheduled
maintenance, repair or replacement and for any emergency or other reasonable
purpose to require the Company to change the Flow Rate upon 60 minutes notice,
notwithstanding the four-hour notice requirement for Flow Rate changes provided
elsewhere in the Service Contract. The District also shall have the right to
require the Company during any shutdown to resume normal operations as
expeditiously as practicable for any such purpose. Any such extraordinary Flow
Rate change or resumption of operations required shall be considered an
Uncontrollable Circumstance. Notwithstanding the foregoing, the Company shall
use its best reasonable efforts to comply with the Hydraulic Transients
Guarantee.
D-16
Plant Shutdowns. The Company shall be permitted to schedule downtime for
Plant maintenance, repair or replacement as follows:
(1) Winter Months. In each of the months of December, January, February
and March, the Company may schedule 2 days of no Finished Water production. In
addition, in the months of January, February and March, the Company may schedule
7 days of Finished Water production of not more than 2.57 MGD. For each
successive day on which the Company schedules no Finished Water production, the
Company shall operate the Plant at a Flow Rate of 5.14 MGD (or such lesser
volume as may be requested by the District) for two days in succession
thereafter before scheduling additional downtime. For each successive day on
which the Company schedules at a Flow Rate of not more than 2.57 MGD of Finished
Water production, the Company shall operate the Plant at a Flow Rate of 5.14 MGD
(or such lesser volume as may be requested by the District) for one day in
succession thereafter before scheduling additional downtime.
(2) Summer Months. In the period from April 1 through November 30, the
Company may schedule 12 days of no Finished Water production. There shall be no
more than 1.5 days of such scheduled downtime per month during such eight month
period. Scheduled downtime shall not overlap successive months.
The Company shall also be entitled to take 3 days in each Contract Year on
which no Finished Water is produced, and shut down the Plant in order to conduct
unscheduled maintenance, repair and replacement work, without restriction as to
the month in which such days are taken. The Company shall use its best efforts
to minimize the duration of such unscheduled periods of downtime, and any
adverse effect on the District's water supply to its customers. On any day on
which the Plant is shut, the District shall not have the right to demand
Finished Water.
The Company acknowledges that operating conditions in the Water System as
a whole may require the immediate curtailment or cessation of delivery of
Finished Water from the Plant. The Company shall curtail or cease supplying
Finished Water at the Finished Water Pumping Station immediately upon receipt by
the Company's Contract Representative or the Facilities Manager of such a
directive by the District's Contract Representative, and the issuance of any
such directive shall constitute an Uncontrollable Circumstance. The Company
shall resume operations of the Plant within 24 hours of receipt by the Company
of a written resumption directive issued by the District's Contract
Representative.
No District Obligation to Demand Water. The District shall have the right,
but not the obligation, during the Operation Period to demand Finished Water.
The District shall pay the Service Fee irrespective of the volume of Finished
Water actually demanded by the District, but shall not be liable in damages or
otherwise for any failure to demand Finished Water.
Insufficiency of Wellfield Supply of Raw Water. In the event that at any
time during the Term the eight Wells originally installed by the Company, when
designed, constructed, operated and maintained by the Company in accordance with
the Contract Standards, do not produce a supply of Raw Water sufficient to
enable the Company to meet the Water Delivery Guarantee, the Company shall
design, drill, construct, install and operate additional Wells in the Wellfield
as required to provide an adequate supply of Raw Water. If a ninth or further
additional Wells are required, the District shall bear all of the capital and
additional operating, maintenance, repair and replacement costs of such ninth
and additional Wells and related pipelines required to connect the Well to the
existing Wellfield. The District shall pay the electricity bills incurred from
the operation of all such additional wells, as provided and subject to the
limitations set forth in the Service Contract. The Company shall be relieved of
its obligation to comply with the Water Delivery Guarantee to the extent of such
Raw Water supply insufficiency, pending the completion of the additionally
required Wells. The District shall have the right to direct the Company to
design, drill, construct, install and operate such additional Wells to remedy
any such insufficiency, or to modify the Water Delivery Guarantee to account for
such insufficiency. The Company shall mitigate, to the maximum extent
practicable, any such additional costs to be borne by the District in the event
that groundwater supplies thereafter increase to a level sufficient to permit
the discontinuance of the operation of some or all of such additional Wells.
Production Efficiency Guarantee. Except to the extent excused by
Uncontrollable Circumstances or District Fault, the Company shall operate the
Project to achieve a Raw Water to Finished Water production efficiency of no
less than 80% of the Raw Water volumes over the course of each Contract Year
following the Acceptance Date.
D-17
Hydraulic Transients Guarantee. Except to the extent relieved for
Uncontrollable Circumstances or District Fault, the Company shall operate the
Project so as to avoid the occurrence of sudden, significant changes in the Flow
Rate and pressure of Finished Water delivered to the Water System.
District Remedies for Non-Compliance with Performance Guarantees. If the
Company fails to comply with any Performance Guarantee and is not excused from
performance as a result of an Uncontrollable Circumstance or District Fault, the
Company shall, without relief under any other Performance Guarantee, and in
addition to any other remedy provided herein, allowed by Applicable Law or
required by a Governmental Body: (1) promptly notify the District within 24
hours of the Company's having knowledge of any such non-compliance; (2) promptly
provide the District within 24 hours with copies of any notices sent to or
received from the EPA, the CADHS or any other Governmental Body having
regulatory jurisdiction with respect to any violations of Applicable Law; (3)
pay liquidated damages in the amounts provided for herein; (4) pay (directly, if
levied against the Company and through the indemnification provisions of the
Service Contract if levied against the District) any other resulting damages,
fines, levies, assessments, impositions, penalties or other charges resulting
therefrom; (5) take any action (including, without limitation, making all
repairs, replacements, Capital Modifications and operating and management
practices changes) necessary, in light of the nature, extent and repetitiveness
of such non-compliance, in order to comply with such Performance Guarantee, to
continue or resume performance of the Contract Services and eliminate the cause
of, and to assure that such non-compliance will not recur; (6) promptly prepare
all public notifications required by Applicable Law, and submit such
notifications for publication; and (7) assist the District with all public
relations matters necessary to adequately address any public concern caused by
such non-compliance, including, but not limited to, preparation of press
releases, attendance at press conferences, and participation in public
information sessions and meetings.
Releases, Leaks and Spills. The Company shall operate the Project in such
a manner that Raw Water, Finished Water or Plant By-Products will not
contaminate, or be released, leak or spill on or into the environment other than
as permitted by the Contract Standards. The Company, after first notifying the
District, shall be responsible for fulfilling all notification of and reporting
requirements established by Applicable Law related to any unauthorized release
into the environment from or in connection with its operation and management of
the Project. The Company shall coordinate with the District in identifying the
source of any unauthorized release and cooperate with the District and all
appropriate Governmental Bodies in effectuating the prompt remediation thereof.
The Company shall, in the most expeditious manner possible under the
circumstances, cause any waste or material released without authorization to be
cleaned up, removed from the Project or other point of release, and transported
to and discharged or disposed of at a landfill or other disposal site which
constitutes an Acceptable Disposal Site, and perform all necessary remediation
measures. All costs associated with the identification, testing, cleanup,
removal, transportation and disposal of such waste or material and performing
necessary remediation measures shall be borne by the Company, except to the
extent the release of the waste or material resulted from an Uncontrollable
Circumstance or District Fault, in which case the appropriate portion of such
costs shall be borne by the District.
Pre-Existing Environmental Conditions. The Company shall operate and
manage the Project so as not to aggravate the effect of any Pre-Existing
Environmental Condition. If at any time a Pre-Existing Environmental Condition
is determined to exist which requires an action under Applicable Law, then the
District shall within 60 days after written notice from any Governmental Body or
the Company of the presence or existence thereof, or within 60 days after the
District's obtaining actual knowledge thereof, commence and diligently prosecute
such actions as may be necessary to dispose of, remediate or otherwise correct
the Pre-Existing Environmental Condition or otherwise make the Pre-Existing
Environmental Condition comply with Applicable Law. The District shall have the
right to contest any determination of a Pre-Existing Environmental Condition and
shall not be required to take any action so long as: (1) the District is
contesting any determination of a Pre-Existing Environmental Condition in good
faith by appropriate proceedings conducted with due diligence; (2) the District
indemnifies the Company in connection therewith; and (3) Applicable Law permits
continued operation of the Project pending resolution of the contest, so that
the Company shall have no liability as a result of the failure of the District
to dispose of, remediate or otherwise correct such Pre-Existing Environmental
Condition during the period of contest. Notwithstanding the foregoing, to the
extent that a Pre-Existing Environmental Condition is discovered which causes
imminent and substantial danger to human health and safety and adversely impacts
the operation of the Plant, the District shall promptly take all necessary
action to dispose of, remediate or otherwise mitigate such imminent condition.
Any such Pre-Existing Environmental Condition or imminent Pre-Existing
Environmental Condition shall constitute an Uncontrollable Circumstance which
relieves Company of its obligations to perform under the Service Contract.
D-18
Company Disposal of Residuals. The Company shall locate an Acceptable
Disposal Site and make all necessary arrangements with the owner or operator
thereof for the disposal of all Residuals during the Term of the Service
Contract. The Company shall store Residuals at the Plant in an enclosed building
in accordance with the Design Requirements. The Company shall operate the Plant
and treat Raw Water so as to minimize the production of Residuals and comply
with the Performance Guarantees. The Company shall transport all Residuals to an
Acceptable Disposal Site in a safe and environmentally sound manner and in
accordance with Applicable Law.
In the event of a release, spill, leak or loss of Residuals during
transfer or transit, the Company shall immediately arrange for the clean-up of
the material and transportation to a Acceptable Disposal Site, and pay any
resulting fines, assessments, penalties or damages resulting therefrom.
The Company shall indemnify, defend and hold and harmless the District in
accordance with the Service Contract, from all Loss-and-Expense that may result
from the generation, processing, transportation or disposal of Residuals.
Company Disposal of Brine. The District shall pay a one-time fee of
$599,640 to the Santa Margarita Water District for the purchase of the right to
discharge up to 1.2 MGD of Brine concentrate, which Brine concentrate shall
consist solely of reverse osmosis concentrate, into the Southeast Regional
Reclamation Authority's ocean outfall. The parties acknowledge that the Project
includes the construction and maintenance of discharge pipes connecting the
Plant and such ocean outfall. In the event such ocean outfall becomes
unavailable or restricted in use for the disposal of brine concentrate for any
reason other than Company Fault, such unavailability or restriction shall
constitute an Uncontrollable Circumstance, and the District shall pay the cost
of providing an alternate disposal method and the Company shall be relieved of
the Performance Guarantees until the alternate disposal method becomes
available. The Company shall, at its own cost and expense, treat and dispose of
all Brine produced at the Plant during the Term of the Service Contract through
such ocean outfall, and shall bear all risk and expense associated with the
siting, permitting, design, construction, and operation of any pipelines and
other assets necessary for the conveyance of the Brine to the ocean outfall;
provided, however, that if the Company is operating the Plant in compliance with
the Production Efficiency Guarantee, the District will pay any additional
charges that are imposed by the Santa Margarita Water District as a result of
the discharge of excessively concentrated or voluminous Brine to the ocean
outfall which is attributable to the treatment of Raw Water having parameters
which are outside the Design Raw Water Quality Parameters. Notwithstanding the
foregoing, the Company shall not produce more than 1.2 million gallons of Brine
for every 5.14 million gallons of Finished Water delivered to the District. The
Company shall operate the Plant and treat Raw Water so as to minimize the
production of Brine and comply with the Performance Guarantees.
Compliance Failures and Liquidated Damages. The Company shall perform the
Contract Services in accordance with the Contract Standards. Except to the
extent the Company is relieved for Uncontrollable Circumstances or District
Fault, the Service Fee shall be reduced by the amounts provided below for the
Company's failures of compliance indicated with the following: (1) failure to
report any exceedence as required by the Contract Standards; (2) failure to
calibrate or verify calibration of flow meters in accordance with the
manufacturer's specifications or, if not specified in the manufacturers
specifications, semi-annually; (3) failure to respond to a written request for
information related to the Service Contract made by the Contract Administrator
and designated as a "priority request" within 3 business days; (4) failure to
provide any plan, proposal, report or other deliverable required with respect to
Uncontrollable Circumstances or any regulatory matter by the deadline agreed
upon by the parties with respect thereto; (5) failure to keep monthly
maintenance logs as required by the Service Contract; (6) failure of Company
staff to attend District meetings as reasonably requested, with adequate
advance notice from the District; (7) failure to provide any reports required
within 7 days of the due date; (8) failure to maintain proper certification as
required by CADHS; (9) failure to maintain adequate quantities of chemicals at
the Sites which leads to a violation of a Performance Guarantee; (10) failure to
respond to alarms at the Plant; and (11) failure to properly sample, test or
report the results thereof as required by Applicable Law.
If the Company fails to comply with any of its performance obligations as
set forth above, the District, within 30 days of its discovery of such
violation, shall notify the Company in writing of its alleged failure to
perform. The Company shall have the right to cure any violation described in
items (2), (4), (8) and (9) above within 15 days of receipts of the District's
notice of violation; any other such violation shall not be subject to cure.
D-19
The Company shall pay to the District, as liquidated damages, the following
amounts (which amounts shall not be subject to escalation):
(1) Nothing for the first failure to perform in any Contract Year.
(2) $250 for the second failure to perform in any Contract Year.
(3) $500 for the third failure to perform in any Contract Year.
(4) $1,000 for the fourth failure to perform in any Contract Year.
(5) $3,000 for the fifth failure to perform in any Contract Year.
(6) $5,000 for the sixth failure to perform in any Contract Year.
(7) $7,000 for each of the seventh and any subsequent failure to perform in
any Contract Year.
The Company shall have the right to contest the occurrence of any alleged
violation or alleged failure to cure, and the Company shall have no obligation
to pay such contested amounts until the contest is resolved.
MAINTENANCE, REPAIR AND REPLACEMENT
Ordinary Maintenance. The Company shall perform all normal and ordinary
maintenance of the machinery, equipment structures, improvements and all other
property constituting the Project, shall keep the Project in good working order,
condition and repair, in a neat and orderly condition and in accordance with the
Contract Standards, and shall maintain the aesthetic quality of the Project as
originally constructed and in accordance with the Design Requirements. The
Company shall provide or make provisions for all labor, materials, supplies,
equipment, spare parts, Consumables and services which are necessary for the
normal and ordinary maintenance of the Project and shall conduct predictive,
preventive and corrective maintenance of the Project as required by the Contract
Standards. The Company shall keep maintenance logs for the Project in accordance
with the Contract Standards.
The Company, in accordance with the Contract Standards, shall keep the
grounds of the Sites in a neat and orderly condition (including the cleanup of
litter and debris on a daily basis or more frequently as required). The Company
shall also maintain and repair all Sites signage, fencing and other security
systems. In addition, the Company shall provide all landscaping services for the
Sites.
Major, Maintenance, Repair and Replacement. The Company shall perform all
major maintenance, repairs and replacement of the machinery, equipment,
structures, improvements and all other property constituting the Project during
the Term of the Service Contract required under the Contract Standards,
including membrane replacement and all other maintenance, repair and replacement
which may be characterized as "major" or "capital" in nature. The District's
approval for any such maintenance, repair or replacement shall not be required
unless it constitutes a Capital Modification, other than a Small Scale Capital
Modification, in which event the District shall have the approval rights set
forth in the Service Contract. The obligations of the Company are intended to
assure that the machinery, equipment, structures and improvements constituting
the Project are properly and regularly maintained in order to preserve their
reliability and in a way such that when the Project is returned to the District
at the end of the Term it is in a condition which does not require the District
to undertake a significant overhaul or immediate replacements in order to
continue to provide water treatment and delivery services. The Company shall
prepare and submit to the District within 90 days before each of the fourth,
ninth, fourteenth and nineteenth anniversaries of the Acceptance Date, a
five-year forecast of the major repair and replacement activities that the
Company believes needs to be performed at the Project during such five-year
period to keep the Project in good working condition and repair so as to be able
to properly perform the Contract Services. To the extent any repair or
replacement is required as a result of Uncontrollable Circumstances or District
Fault, the District shall pay the costs thereof.
Replacements Constituting Capital Modifications. The Company shall bear
the cost and expense of all maintenance, repairs and replacements required under
this Article, including the cost and expense of any maintenance, repair or
replacement that may constitute a Capital Modification, unless otherwise
provided in the Service Contract.
Project Evaluations. The Independent Evaluator shall, within 180 days
following the Acceptance Date, photograph and prepare an itemized inventory of
all property constituting the Project and having an installed cost greater than
$1,000, including records of assets originally installed, manufacturer,
identification number and original cost data (the "Baseline Project Record").
The Baseline Project Record shall be prepared in accordance with the Service
Contract, shall distinguish Project Equipment and Project Structures, and shall
reflect, based on the Fixed
D-20
Design/Build Price and the Design Requirements, the condition, functionality,
value and useful life of the Project as originally constructed by the Company
under the Service Contract.
Final Evaluations of the Project. Not later than six months following the
sixteenth anniversary of the Acceptance Date, the Independent Evaluator shall
conduct a final evaluation of the Project in accordance with the protocol
established in the Service Contract and shall utilize standard utility property
evaluation methods. In connection with the final asset evaluation, the Company
shall furnish the District and the Independent Evaluator with the Baseline
Project Record prepared pursuant to the Service Contract and all data base
information developed in connection with the implementation of the Company's
computerized maintenance management system. The evaluation of the Project
Structures shall determine and establish the physical condition of the Project
Structures. The evaluation of the Project Equipment shall determine and
establish the weighted average useful life of the Project Equipment as of the
date of evaluation (expressed as a single number of years, carried to one
decimal place), taking into account the performance capability and value of each
piece of Project Equipment. The final evaluation shall exclude the value of any
Capital Modifications to the extent paid for by the District, directly or
indirectly, other than those made on account of Uncontrollable Circumstances or
District Fault. The Independent Evaluator shall also conduct such a final
evaluation not later than six months prior to the Termination Date resulting
from the expiration of the Service Contract. The Contract Year 16 evaluation
shall be for the informational purposes of the parties only. The Contract Year
20 evaluation shall be used for the purpose of determining compliance with the
Company's obligations under the Service Contract.
Required Condition of Project Structures Upon Return to the District. The
Project Structures shall be returned to the District in good condition, working
order and repair as when new, with ordinary wear and tear excepted as determined
in light of the Company's maintenance, repair and replacement obligations. At
the end of the Initial Term, each individual Project Structure listed in the
Baseline Project Record must have a functionality and structural integrity
rating of at least "3" (as described in the Service Contract). In the event the
final audit establishes a functionality and structural integrity rating
deficiency, the Company shall, at the election of the Company, either remedy the
deficiency or make a cash payment to the District sufficient to enable the
District to remedy the deficiency.
Required Condition of Project Equipment Upon Return to the District. The
Project Equipment shall be returned to the District in a condition and state of
repair such that, in the aggregate, the weighted average useful life of the
Project Equipment at the end of the Initial Term is equal to or greater than (1)
3 years, in the case of Project Equipment having an installed cost of $2,500 or
greater, and (2) 2 years, in the case of Project Equipment having an installed
cost of between $1,000 and $2,500. There shall be no weighted average useful
life requirement with respect to Project Equipment having an installed cost of
less than $1,000. In the event the final audit establishes a maintenance, repair
and replacement weighted average useful life deficiency, the Company shall, at
the election of the Company, either remedy the deficiency or make a cash payment
to the District sufficient to enable the District to remedy the deficiency.
In the event that Capital Modifications constituting Project Structures
are made during the Term, such assets shall be returned to the District on the
Termination Date in good condition, working order and repair, with ordinary wear
and tear excepted as determined in light of the Company's maintenance, repair
and replacement obligations. In the event that Capital Modifications
constituting Project Equipment are made during the Term and are paid for by the
District, such Capital Modifications shall be disregarded in preparing the final
evaluation of the Plant. The weighted average useful life of all such assets as
an aggregate which are paid for by the District, however, shall be separately
determined in the final asset evaluation, and shall be equal to or greater than
the weighted average useful life for Project Equipment. Reasonable conventions
may be adopted in the weighting analysis to take account of the varying dates of
installation. Capital Modifications and other maintenance, repairs and
replacements paid for by the Company, including computer and other replacement
systems installed based on advances in technology, shall be included in the
final asset evaluation, and their remaining useful life included in such final
evaluation.
The expense of the Independent Evaluator for all services performed
pursuant hereto shall be borne by the District. The determination by the
Independent Evaluator as to any matter arising with respect to the final
evaluation of the Project which is in dispute between the District and the
Company and which involves amounts less than $250,000 (as adjusted annually from
the Contract Date based on the Adjustment Factor) shall be final and
D-21
binding upon the parties; for disputes involving amounts greater than $250,000,
the Independent Evaluator's determination shall be advisory only, and any such
dispute shall be handled as provided in the Service Contract.
Loss, Damage or Destruction to the Project. The Company shall use care and
diligence, and shall take all appropriate precautions, to protect the Project
from loss, damage or destruction. The Company shall promptly report to the
District and the insurers, upon obtaining knowledge thereof, any damage or
destruction to the Project and as soon as practicable thereafter shall submit a
full report to the District. The Company shall also submit to the District
within 24 hours of receipt copies of all accident and other reports filed with,
or given to the Company by, any insurance company, adjuster or Governmental
Body. The parties shall cooperate so as to promptly commence and proceed with
due diligence to complete the repair, replacement and restoration of the Project
to at least the character or condition thereof existing immediately prior to the
loss, damage or destruction, in accordance with the Service Contract. The
District shall have the right to monitor, review and inspect the performance of
any repair, replacement and restoration work by the Company as if such work
constituted part of the Project as originally constructed.
To the extent that any repair, replacement or restoration costs incurred
can be recovered from any insurer or from another third-party, each party shall
assist each other in exercising such rights as it may have to effect such
recovery. Each party shall provide each other with copies of all relevant
documentation at no cost to the other party, and shall cooperate with and assist
the other party upon request by participating in conferences, negotiations and
litigation regarding insurance claims.
The District shall provide all funds necessary to pay the costs of
repairing, replacing and restoring the Project and all insurance proceeds and
recoveries from third parties resulting from damage to or the loss or
destruction of the Project shall be for the account of the District; provided,
however, that such costs not covered by insurance proceeds or third-party
payments shall be borne by the Company to the extent the loss, damage or
destruction was not caused by Uncontrollable Circumstances or District Fault.
The Company shall promptly repair or replace all Municipal Property and
all private property damaged by the Company or any officer, director, employee,
representative or agent of the Company in connection with the performance of, or
the failure to perform, the Contract Services, except (1) to the extent any such
damage was caused by Uncontrollable Circumstances or District Fault, or (2) for
reasonable wear and tear resulting from heavy construction activities prior to
the Acceptance Date to Del Obispo Road and the City parking lot resulting from
the performance of the Design/Build Work. The repair and replacements shall
restore the damaged property, to the maximum extent reasonably practicable, to
its character and condition existing immediately prior to the damage.
CAPITAL MODIFICATIONS
District Approval. The District shall have the right, in its sole
discretion, to approve all Capital Modifications; provided, however, that the
Company may implement Small Scale Capital Modifications without District
approval, if the requirements of the Service Contract are complied with. All
Capital Modifications shall be made and implemented in accordance with this
Article. The District shall have the express right to condition its approval of
Capital Modifications upon the sharing of net cost savings expected to result
therefrom.
In the event any Capital Modification is made, the Company shall bear the
cost and expense thereof and all related operation, maintenance, repair and
replacement costs, unless the Capital Modification is directed by the District
(other than as part of an enforcement action taken in response to a breach
hereof) or is necessitated by District Fault or is necessary to address an
Uncontrollable Circumstance.
Capital Modifications at Company Request. The Company shall give the
District written notice of, and reasonable opportunity to review and comment
upon, any Capital Modification proposed to be made at the Company's request,
whether before or after Acceptance. The notice shall contain sufficient
information for the District to determine that the Capital Modification: (1)
does not diminish the capacity of the Project to be operated so as to meet the
Contract Standards; (2) does not impair the quality, integrity, durability and
reliability of the Project; (3) is reasonably necessary or is advantageous for
the Company to fulfill its obligations under the Service Contract; and (4) is
feasible. The Company shall not be entitled to any adjustment in the terms of
the Service
D-22
Contract as a result of any such Capital Modification unless approved by the
District or made a condition of approval by the District in its sole discretion.
Capital Modifications Due To Uncontrollable Circumstances. Upon the
occurrence of an Uncontrollable Circumstance, the District shall promptly
proceed, subject to the terms, conditions and procedures set forth in the
Service Contract, to make or cause to be made all Capital Modifications
reasonably necessary to address the Uncontrollable Circumstance. The Company
shall consult with the District concerning possible means of addressing and
mitigating the effect of any Uncontrollable Circumstance, and the Company and
the District shall cooperate in order to minimize any delay, lessen any
additional cost and modify the Project so as to permit the Company to continue
providing the Contract Services in light of such Uncontrollable Circumstance.
The design and construction costs of any such Capital Modification, and any
related operation, maintenance, repair and replacement costs, shall be borne by
the District except to the extent provided in the Service Contract pertaining to
cost sharing. The District shall pay the Capital Modification costs and any such
related operation, maintenance, repair and replacement costs for which it is
responsible in the manner established in accordance with the procedures set
forth in the Service Contract.
Capital Modifications at District Direction. The District shall have the
right to make Capital Modifications at any time and for any reason whatsoever,
whether and however the exercise of such rights affects the Service Contract so
long as the Company's rights are protected as provided in the Service Contract.
The design and construction costs of any such Capital Modification made at the
District's direction, and any related operation, maintenance, repair and
replacement costs, shall be borne by the District, through District financing
and through an adjustment to the Service Fee. The Company shall have no
responsibility for any such costs unless the Company agrees in its sole
discretion to participate in the financing thereof upon terms and conditions
acceptable to the Company. The District shall have no obligation to direct the
Company to make any Capital Modification.
District Financing. The District shall provide financing for any Capital
Modification for which it is financially responsible under the Service Contract,
and shall make the proceeds of the financing available to the Company to pay the
negotiated price on the milestone schedule and subject to any retainage
negotiated by the parties. The District in its sole discretion may voluntarily,
if requested by the Company, provide financing for the Capital Modifications for
which the Company is financially responsible under the Service Contract, on
terms and conditions established by the District in its sole discretion.
Company Financing. The District may request the Company to finance all or
any portion of the cost of any Capital Modification. The terms and conditions of
any such financing and its impact on the Service Contract shall include, but are
not limited to, any District right to refinance any such Company financing and
any reimbursement due the Company with respect to the unamortized principal
amount of such financing if the Service Contract is terminated prior to the end
of its scheduled Term. If the Company agrees to provide financing for any
Capital Modifications and assigns the Service Contract as security therefor, the
loan documents related to such financing may require that all or a portion of
each Service Fee payment be paid to a trustee or paying agent, either on a
regular basis or upon the occurrence of certain stated events. In such a case,
upon being notified in writing of such requirement by the Company, the District
shall make payment as required therein and the Company shall, as between it and
the District, accept any payment made to such trustee or paying agent as
required therein as payment to the Company.
Company Non-Impairment Rights. No Capital Modification, other than a
Company-requested Capital Modification, shall be made that materially impairs
any right, materially impairs the ability to perform, imposes any material
additional obligation or liability, or materially increases the costs of the
Company under the Service Contract, including operating, maintenance, repair and
replacement costs related to such Capital Modification. Any Capital Modification
undertaken by the District which violates the Company's rights under the Service
Contract shall relieve the Company from its Performance Guarantee and indemnity
obligations under the Service Contract to the extent such obligation is affected
by the unauthorized Capital Modification.
SERVICE FEE
Service Fee. From and after the Acceptance Date, the District shall pay
the Service Fee to the Company as compensation for the Company's performing the
Operation Services under the Service Contract.
D-23
Service Fee Formula. The annual Service Fee shall be calculated in
accordance with the following formula:
SF = BOC + EI
where,
SF = Service Fee
BOC = Base Operating Charge
EI = Extraordinary Items Charge or Credit
Base Operating Charge. The Base Operating Charge shall be calculated in
accordance with the following formulas:
BOC = FC + VC
FC = OMC + LC + RC
VC = DAE + ESE
where,
BOC = Base Operating Charge
FC = Fixed Component
OMC = Operation and Maintenance Component
LC = Labor Component
RC = Replacement Component
VC = Variable Component
DAE1 = First Water Demand Adjustment Element
DAE2 = Second Water Demand Adjustment Element
ESE = Electricity Savings Element
Adjustment Factor. The "Adjustment Factor" for purposes of the Service
Contract, when used with respect to the second and each subsequent Contract
Year, shall be determined as follows:
AFn = 1 + {(0.90) X [(CPI-Un-1 - CPI-Un-2) ? CPI-Un-2]}
where,
AFn = The Adjustment Factor for Contract Year "n"
CPI-Un-1 = The average of the 12 month CPI-U values occurring
in the Contract Year preceding the Contract Year with
respect to which a calculation is to be made.
CPI-Un-2 = The average of the 12 month CPI-U value occurring in
the Contract Year two years preceding the Contract
Year with respect to which a calculation is to be
made.
Fixed Component. The Fixed Component of the Base Operating Charge shall be
the sum of: (1) the Operation and Maintenance Component, (2) the Labor
Component, and (3) the Replacement Component. The Fixed Component of the Base
Operating Charge represents compensation for the District's right to demand the
production and delivery of up to 4,800 acre feet of Finished Water per Contract
Year. The Company shall be compensated for the production and delivery of
Finished Water in volumes in excess of 4,800 acre feet per Contract Year through
the Variable Component of the Base Operating Charge.
The Operation and Maintenance Component. The Operation and Maintenance
Component for the Contract Year ending on June 30, 2003 shall be $611,400. The
Operation and Maintenance Component for each subsequent Contract Year shall be
determined by multiplying (1) the Operation and Maintenance Component for the
previous Contract Year, times (2) the Adjustment Factor.
The Labor Component. The Labor Component for the Contract Year ending on
June 30, 2003 shall be $170,600. The Labor Component for each subsequent
Contract Year shall be determined by multiplying (1) the Labor Component for the
previous Contract Year, times (2) the Adjustment Factor.
D-24
The Replacement Component. The Replacement Component for the Contract Year
ending on June 30, 2003 shall be $312,900. The Replacement Component for each
subsequent Contract Year shall be determined by multiplying (1) the Replacement
Component for the previous Contract Year, times (2) the Adjustment Factor.
Variable Component. The Variable Component of the Base Operating Charge
shall be the sum of: (1) the First Water Demand Adjustment Element, (2) the
Second Water Demand Adjustment Element and (3) the Electricity Savings Element.
First Water Demand Adjustment Element. In the event that the District's
demand for Finished Water in any Contract Year is greater that 4,800 acre feet
and less than 5,231 acre feet, the District shall pay the Company as the First
Water Demand Adjustment Element an amount equal to the product of: (1) $151 per
acre foot of Finished Water (for the Contract Year ending June 30, 2003 and
adjusted annually thereafter based on the Adjustment Factor), and (2) the
difference between the volume of Finished Water delivered to the District by the
Company (measured in acre feet of Finished Water) and 4,800 acre feet.
Second Water Demand Adjustment Element. If the District requests, and the
Company supplies at its election, more than 5,231 acre-feet of Finished Water in
any Contract Year, the District shall pay to the Company as the Second Water
Demand Adjustment Element an amount equal to the product of: (1) $228 per
acre-foot of Finished Water (for the Contract Year ending June 30, 2003 and
adjusted annually thereafter based on the Adjustment Factor), and (2) the
difference between the volume of Finished Water delivered to the District by the
Company (measured in acre-feet of Finished Water) and 5,231 acre-feet.
Electricity Savings Element. The Electricity Savings Element in a Contract
Year, if payable, shall be the sum of (1) the Electricity Consumption Savings
and (2) the Electricity Demand Savings. If the annual electricity consumption
for the Project in a Contract Year is greater than the Guaranteed Maximum
Electricity Consumption applicable for that Contract Year, or the average
monthly electricity demand for the Project for the Contract Year is greater than
the Guaranteed Maximum Electricity Demand applicable for that Contract Year,
then the Electricity Savings Element for that Contract Year shall be equal to
zero. If the annual electricity consumption for the Project in a Contract Year
is less than 95% of the Guaranteed Maximum Electricity Consumption applicable
for that Contract Year, and the average monthly electricity demand for the
Project for the Contract Year is less than or equal to the Guaranteed Maximum
Electricity Demand for the Contract Year, then the Company shall be entitled to
an incentive payment (i.e., the Electricity Consumption Savings) equal to 50% of
the product of: (1) twelve; (2) the average "generation charges" representing
the total cost of electricity (i.e., all charges based upon kilowatt hours
consumed, including any directly related prorated charges, including, but not
limited to, transmission charges, deregulation fees and taxes) for the Contract
Year, measured in dollars per kilowatt hour consumed ($/kWh); and (3) the
difference between (a) 95% of the Guaranteed Maximum Electricity Consumption and
(b) the actual annual electricity consumed, measured in kilowatt hours, for the
Project in the Contract Year. If the average monthly electricity demand for the
Project in a Contract Year is less than the 95% of the Guaranteed Maximum
Electricity Demand applicable for that Contract Year, and the annual electricity
consumption for the Project for the Contract Year is less than or equal to the
Guaranteed Maximum Electricity Consumption for the Contract Year, then the
Company shall be entitled to an incentive payment (i.e., the Electricity Demand
Savings) equal to 50% of the product of: (1) twelve; (2) the average "demand
charges" (i.e., all charges based upon monthly kilowatt demand, including any
directly related prorated changes and taxes) for the Contract Year, measured in
dollars per kilowatt demanded ($/kW); and (3) the difference between (a) 95% of
the Guaranteed Maximum Electricity Demand and (b) the actual average monthly
demand for the Project in the Contract Year. The Electricity Savings Element
shall not be paid to the Company for electricity consumption or demand savings
generated by District actions or initiatives.
Extraordinary Items Charge or Credit. The Extraordinary Items component of
the Service Fee, which may be a charge or a credit, shall be equal to the sum
of: (1) the amounts payable by the District for increased operation, maintenance
or other costs incurred on account of the occurrence of an Uncontrollable
Circumstance which is chargeable to the District under the Service Contract, net
of any operation, maintenance or other cost savings achieved by the Company in
mitigating the effects of the occurrence of such an Uncontrollable Circumstance;
plus (2) the adjustments to the Service Fee resulting from any Capital
Modifications the costs of which are payable by the District, or the benefits of
which accrue to the District, under the provisions of the Service Contract;
minus (3) any liquidated damages or Service Fee reductions due to Company
non-performance specifically provided for under any
D-25
other provision hereof; plus or minus (4) any other increase or reduction in the
Service Fee provided for under any other Article of the Service Contract.
Tax Exemption Of Managed Assets. It is the intent of the parties that the
Managed Assets shall continue to be municipally owned property and not subject
to real property or possessory interest taxation. If (1) the Company has
exercised due diligence and taken all steps necessary to obtain all such tax
exemptions on a timely basis, and (2) the Company is nonetheless required to pay
any real property or possessory interest tax on account of the Project, the
Company shall be entitled to recover the amount paid as a Reimbursable Cost.
Sales And Business Taxes. In its performance of the Contract Services, the
Company acknowledges that (1) construction materials and supplies initially
acquired by the Company or any Subcontractor in connection with the Project
Improvements or any Capital Modification, and operating supplies relating to the
performance of the Management Services, are subject to State sales tax, and (2)
the Company is subject to the City's "business tax". The Company further
acknowledges that these taxes have been priced into the Design/Build Price and
the Service Fee, and agrees to pay all such taxes without reimbursement from the
District.
Compliance With Internal Revenue Service Rev. Proc. 97-13. Any provision
of the Service Contract to the contrary notwithstanding, the District and the
Company agree that the District shall be under no obligation to, and shall not,
pay compensation for services to the Company for any Contract Year, to the
extent that such payment would result in less than 80% of the Company's
compensation for services for such Contract Year being based on a periodic fixed
fee or would result in any portion of the Company's compensation being based on
net profit, as such terms are defined in Rev. Proc. 97-13. The District and the
Company further agree that any such payment or portion thereof that is not made
by virtue of the preceding sentence shall be paid to the Company, with interest
at the Prime Rate, during the next annual period in wnich such payment will not
result in less than 80% of the Company's compensation being based on a periodic
fixed fee or in which such payment will be based on net profit, all as defined
by Rev. Proc. 97-13. It is the intent of the District and the Company that the
Service Contract shall be construed and applied so as to constitute a management
contract that does not result in private business use of property financed by
the District within the meaning and intent of Rev. Proc. 97-13.
BREACH, DEFAULT, REMEDIES AND TERMINATION
Remedies For Breach. The parties agree that, except as otherwise provided
with respect to termination rights, in the event that either party breaches the
Service Contract, the other party may exercise any legal rights it may have
under the Service Contract, under the Security Instruments and under Applicable
Law to recover damages or to secure specific performance, and that such rights
to recover damages and to secure specific performance shall ordinarily
constitute adequate remedies for any such breach. Neither party shall have the
right to terminate the Service Contract for cause except upon the occurrence of
an Event of Default. Notwithstanding any other provision hereof, in the event
either party breaches the Service Contract, the other party shall be entitled to
all available legal or equitable remedies as provided in and within the meaning
of Section 5956.6 of the Government Code.
Event of Default by the Company Not Requiring Previous Notice or Cure
Opportunity for Termination. In the event the Company fails to achieve
Acceptance by the last day of the Extension Period, an Event of Default by the
Company shall be deemed to have occurred, on the basis of which the District, by
notice to the Company, may terminate the Service Contract without any
requirement of having given notice previously or of providing any further or
additional cure opportunity.
Events of Default by the Company Requiring Previous Notice and Cure
Opportunity for Termination. It shall be an Event of Default by the Company upon
which the District may terminate the Service Contract, by notice to the Company,
if:
(i) Any representation or warranty of the Company under the Service
Contract or the Guarantor under the Service Contract Guaranty Agreement was
false or inaccurate in any material respect when made, and the legality of the
Service Contract or the Service Contract Guaranty Agreement or the ability of
the Company to carry out its obligations under the Service Contract or the
ability of the Guarantor to carry out its obligations thereunder is thereby
materially and adversely affected; or
D-26
(ii) The Company fails, refuses or otherwise defaults in its duty (a) to
pay any amount required to be paid to the District under the Service Contract
within 60 days following the due date for such payment, or (b) to perform any
material obligation under the Service Contract (unless such default is excused
by an Uncontrollable Circumstance or District Fault as and to the extent
provided herein); or
(iii) The insolvency of the Company or the Guarantor as determined under
the Bankruptcy Code; or
(iv) The filing by the Company or the Guarantor of a petition of
voluntary bankruptcy under the Bankruptcy Code; the consenting of the Company or
the Guarantor to the filing of any bankruptcy or reorganization petition against
the Company or the Guarantor under the Bankruptcy Code; or the filing by the
Company or the Guarantor of a petition to reorganize the Company or the
Guarantor pursuant to the Bankruptcy Code; or
(v) The issuance of an order of a court of competent jurisdiction
appointing a receiver, liquidator, custodian or trustee of the Company or the
Guarantor or of a major part of the Company's or the Guarantor's property,
respectively, or the filing against the Company or the Guarantor of a petition
to reorganize the Company or the Guarantor pursuant to the Bankruptcy Code,
which order shall not have been discharged or which filing shall not have been
dismissed within 90 days after such issuance or filing, respectively.
No such default shall constitute an Event of Default giving the District
the right to terminate the Service Contract for cause unless, (1) the District
has given prior written notice to the Company stating that in its opinion a
specified default in its duty to pay or perform exists which gives the District
a right to terminate the Service Contract for cause, and describing the default
in reasonable detail; and (2) the Company neither challenged in an appropriate
forum the District's conclusion that such a failure or refusal to perform has
occurred or constitutes a material breach of the Service Contract, nor initiated
within a reasonable time (in any event not more than 30 days from the initial
default notice) and continued with due diligence to carry out to completion all
actions reasonably necessary to correct the default and prevent its recurrence;
except that if the Company shall have initiated within such reasonable time and
continued with due diligence to carry out to completion all such actions, the
default shall not constitute an Event of Default during such period of time (in
any event not more than 120 days from the initial default notice) as the Company
shall continue with due diligence to carry out to completion all such actions.
The right of termination provided the District upon an Event of Default by
the Company is not exclusive. If the Service Contract is terminated by the
District for an Event of Default by the Company, the District shall have the
right to pursue a cause of action for actual damages and to exercise all other
remedies which are available to it under the Service Contract, under the
Security Instruments and under Applicable Law.
Protection of Trustee. During the Lease Term, the Trustee, as assignee of
the rights of the Issuer under the Lease Agreement, shall be entitled to the
protections set forth in the Service Contract if the Trustee has (1) provided
the District with the Trustee's address for notices under the Service Contract,
(2) acknowledged the District's rights with respect to the Company, the Trustee
and the Project as provided under the Service Contract, and (3) paid any
non-performance liquidated damages to the District which are due and owing by
the Company.
The Trustee shall be protected as described below, until such time as the
Lease Agreement expires or has been terminated:
(1) The District shall not consent to any amendment or modification of
the Service Contract (including any amendment or modification effectuated
through non-binding mediation or arbitration) which materially aid adversely
affects the rights and interests of the Trustee without the prior written
consent of the Trustee, such written consent to be submitted by the Company.
(2) Notwithstanding any Event of Default by the Company under the
Service Contract, the District shall have no right to terminate the Service
Contract unless prior to such termination (a) the Event of Default shall be
continuing, (b) the District shall have given the Trustee written notice of such
Event of Default, and (c) the Trustee shall have failed to remedy such Event of
Default or to take such other actions as set forth in and within the time
specified by the Service Contract.
D-27
During the Lease Term, should any Event of Default by the Company under
the Service Contract occur, the District shall mail or deliver to the Trustee a
duplicate copy of any and all notices in writing that the District may from time
to time give to or serve upon the Company pursuant to the provisions of the
Service Contract. Any such notice shall set forth the nature of the Event of
Default and the actions required to cure such Event of Default. Each such notice
shall be mailed or delivered to the Trustee at or as near as possible to the
time such notices are given to or served upon the Company by the District if
required to be so served or at the earliest opportunity if such notice is not
required to be given to the Company. No notice by the District to the Company
shall be deemed to be given to the Company unless and until a copy thereof shall
have been mailed or delivered to the Trustee.
If an Event of Default by the Company occurs which does not require notice
or cure opportunity under the Service Contract, the Trustee shall have no right
of cure thereafter, the parties agreeing that the 547 day Extension Period
following the Scheduled Acceptance Date constitutes a reasonable and sufficient
period of cure to remedy any failure to achieve Provisional Acceptance on or
before the Scheduled Acceptance Date. Any rights of the Trustee with respect to
the Company and its performance during the Construction Period shall be provided
for in the Company Financing Support Agreements, the terms and conditions of
which shall be consistent with the Service Contract and shall not materially and
adversely affect the District's rights under the Service Contract.
If a default by the Company occurs under the Service Contract which, with
the giving of notice or the passage of time, may lead to an Event of Default by
the Company under the Service Contract, and the Company shall have failed to
cure such default on or before the expiration of any applicable period of cure
provided in the Service Contract, the Trustee shall have 120 days after the
later of the expiration of the Company's cure period with respect to such
default, or the date of the Trustee's receipt of written notice of the
occurrence of an Event of Default from the District, and an additional 230 day
period of time after the expiration of such 120 day period within which to
remedy such default; provided that the Trustee shall (1) have fully cured any
default in the payment of any monetary obligations of the Company under the
Service Contract within such 120 day period and shall continue to pay current
such monetary obligations as and when they are due, (2) shall have commenced
action to cure any nonmonetary default within such 120 day period, and (3) shall
thereafter diligently prosecute such action or proceeding to completion by no
later than 350 days after the Trustee's receipt of such notice from the
District. All rights of the District during the Lease Term to terminate the
Service Contract as a result of the occurrence of any Event of Default by the
Company shall be subject to and conditioned upon the District having first given
to the Trustee written notice of such default and the Trustee having failed to
act within the time specified, or such longer time as extended by the Service
Contract.
During any Trustee cure period described in the Service Contract, the
Trustee shall have the right to assign (and the Company in such circumstances
agrees to the assignment of) the Company's rights and obligations under the
Service Contract to any replacement operator recognized as competent in the
water treatment industry and as being technically and financially capable of
carrying out both the Company's obligations under the Service Contract and the
Guarantor's obligations under the Service Contract Guaranty Agreement for the
remaining Term. Any such replacement operator shall be subject to the approval
of the District, which approval shall be based on the standards set forth in the
preceding sentence and shall not unreasonably be withheld. No such assignment
shall take place unless and until the replacement operator has executed and
delivered to the District an agreement acknowledging and confirming its
assumption of all of the Company's obligations under the Service Contract,
together with all authorizing documentation. All of the rights of the District
with respect to the Project, the Company and the Trustee set forth in the
Service Contract shall be fully preserved with respect to the Project, any
replacement operator and the Trustee on any such conveyance, assignment and
assumption.
If the Service Contract shall have been rejected or disaffirmed by or on
behalf of the Company in a proceeding under the Bankruptcy Code or other
insolvency law then, unless the Service Contract has theretofore been terminated
due to an Event of Default by the Company, on written request of the Trustee
made at any time within 60 days after the date on which notice of such rejection
or disaffirmance shall have been given, the District shall enter into a new
agreement with respect to the Project with a designee of the Trustee meeting the
requirements of the Service Contract for a replacement operator. The new
agreement shall be effective as of the effective date of such rejection or
disaffirmance of the Service Contract, for the Term of the Service Contract
remaining as of the effective date of such rejection or disaffirmance, upon the
same executory terms, covenants, conditions and agreements as are contained in
the Service Contract; provided, however, that the District shall not be so
obligated unless (a) such designee shall execute and deliver such new agreement
within 20 days after the later of the date on
D-28
which the Trustee shall have given the District notice of its election to do so
or the date on which the District shall tender such new agreement to such
designee for execution, and (b) the Trustee or its designee shall pay to the
District at the time of the execution and delivery of such new agreement all
expenses, including reasonable attorney's fees, incurred by the District in
connection with the termination of the Service Contract and the execution and
delivery of such new agreement. The Trustee's cure right period provided under
the Service Contract shall continue in effect with respect to such new agreement
and the expiration of such cure right period shall be determined by reference to
the date on which such cure right period commenced with respect to the Service
Contract. Notwithstanding the foregoing, the District shall have no obligation
to deliver physical possession of the Project to any such designee until and
unless the District shall have obtained physical possession thereof.
The rights of the Trustee to cure an Event of Default by the Company and
to appoint a replacement operator shall not relieve the Company or any such
replacement operator from its continuing obligation to perform the Contract
Services. The Trustee's rights shall be subject to the timely payment and
performance by the Trustee or another entity as arranged for by the Trustee, on
behalf of the Company, of all non performance damages and other obligations
which are to be performed or paid by the Company to the District and which
remain unperformed or unpaid as of the due date.
Bond Insurer Cure Rights. At all times during which a policy of municipal
bond insurance is in effect as contemplated by the Service Contract and the Bond
Insurer is not in default under such policy, the Bond Insurer, and not the
Trustee, shall have the rights and obligations given the Trustee under the
Service Contract.
Events Of Default By The District. Each of the following shall constitute
an Event of Default by the District upon which the Company, by notice to the
District, may terminate the Service Contract:
(i) Any representation or warranty of the District under the Service
Contract was false or inaccurate in any material respect when made, and the
legality of the Service Contract or the ability of the District to carry out its
obligations under the Service Contract is thereby adversely affected;
(ii) The failure, refusal or other default by the District in its duty:
(1) to pay the amount required to be paid to the Company under the Service
Contract within 60 days following the due date for such payment; or (2) to
perform any other material obligation under the Service Contract (unless such
default is excused by an Uncontrollable Circumstance or Company Fault); or
(iii) The authorized filing by the District of a petition seeking relief
under the Bankruptcy Code, as applicable to political subdivisions which are
insolvent or unable to meet their obligations as they mature; provided that the
appointment of a financial control or oversight board by the State for the
District shall not in and of itself constitute an Event of Default.
No such default shall constitute an Event of Default giving the Company the
right to terminate the Service Contract for cause unless:
(i) The Company has given prior written notice to the District stating
that a specified default which gives the Company a right to terminate the
Service Contract for cause has occurred, and describing the default in
reasonable detail; and
(ii) The District has neither challenged in an appropriate forum the
Company's conclusion that such failure or refusal to perform has occurred or
constitutes a material breach of the Service Contract nor corrected or
diligently taken steps to correct such default within a reasonable period of
time but not more than 30 (thirty) days from the date of the notice (but if the
District shall have diligently taken steps to correct such default within a
reasonable period of time, the same shall not constitute an Event of Default for
as long (but in any event not more than 120 days from the initial default
notice) as the District is diligently continuing to take such steps to correct
such default).
Other Remedies Upon District Event of Default-Prior to Tenth Anniversary
of Acceptance Date. The right of termination provided under the Service Contract
upon an Event of Default by the District is not exclusive. If the
D-29
Service Contract is terminated by the Company for an Event of Default by the
District prior to the tenth anniversary of the Acceptance Date, the Company
shall have the right to pursue a cause of action for actual damages and to
exercise all other remedies which are available to it under the Service Contract
and under Applicable Law.
Other Remedies Upon District Event of Default - After Tenth Anniversary of
Acceptance Date. If the Service Contract is terminated by the Company for cause
as a result of an Event of Default by the District after the tenth anniversary
of the Acceptance Date, the District shall pay the Company, as liquidated
damages upon any such termination, the same amount that would be payable upon a
District buy-out during the Operation Period, as set forth in the table below,
based on the date the Event of Default by the District occurs, which amount
shall be interpolated appropriately if the Event of Default occurs between the
two-year anniversary dates set forth in such table.
District Termination Right Relating To Certain Principal Agreements. The
District shall have the right, at any time on or before December 31, 2002, to
terminate the Service Contract upon written notice to the Company in the event
that the District determines, in its sole discretion, that it will be unable to
achieve (1) modification of the Metropolitan Agreement to the effect described
in the Service Contract, or (2) agreement with the San Juan Basin Authority to
the effect described in the Service Contract. All obligations of the parties
under the Service Contract shall terminate on the effective date of any such
termination. If the District exercises its termination right under after October
15, 2002, the District shall pay the Company an amount equal to the sum of (1)
the amount of the first installment of the Transaction Cost Reimbursement
Payment made by the Company to the District; plus (2) subject to Cost
Substantiation, an amount equal to 100% of the reasonable costs incurred
directly by the Company and any expenses paid or incurred to third parties from
the Contract Date to the Termination Date which are directly related to the
performance of the Design/Build Work, not to exceed the Design/Build Price.
District Buy-Out Right For Significant Uncontrollable Circumstances During
The Construction Period. In the event an Uncontrollable Circumstance causes a
total constructive loss of the Project, or in the event an Uncontrollable
Circumstance causes an extraordinary increase in District costs relating to the
Project, in either case due to events occurring during the Construction Period,
the District shall have the right to terminate the Service Contract upon payment
to the Company of the Construction Period buy-out fee set forth below. A "total
constructive loss" for this purpose shall be deemed to have occurred: (1) if so
determined by the property insurance carrier; or (2) if re-construction cannot
reasonably be expected to commence within six months following the occurrence of
the Uncontrollable Circumstance. "An extraordinary increase" in District costs
shall be deemed to have occurred for this purpose if the increase in the
Effective Rate for Finished Water in the first full Contract Year which would
reasonably be expected to result from an Uncontrollable Circumstance occurring
during the Construction Period would cause an increase of more than 20% in the
Effective Rate for Finished Water which would reasonably expected to be payable
in such first full Contract Year had no such Uncontrollable Circumstance
occurred. Promptly following receipt of the District's termination notice, the
Company shall prepare and deliver to the District an invoice for the
Construction Period buy-out-fee payable, including all required Cost
Substantiation. The District shall pay the invoice within 30 days following
receipt thereof.
The Construction Period buy-out fee shall be an amount equal to the sum of
(1) subject to Cost Substantiation, an amount equal to 100% of the reasonable
costs incurred directly by the Company and any expenses paid or incurred to
third parties from the Contract Date to the Termination Date (including
reasonable demobilization costs for work required of the Company upon
termination) which are directly related to the performance of the Design/Build
Work, not to exceed the Design/Build Price; plus (2), an amount equal to 10% of
the amount described in item (1) above (but not less than $250,000 nor more than
$2,000,000).
The District shall have no obligation to pay the buy-out fee provided for
under the Service Contract except concurrently with the surrender of possession
and control by the Company of the Project to the District.
The Company agrees that the buy-out fee shall fully and adequately
compensate the Company and all Subcontractors for all foregone potential
profits, Loss-and-Expense, and charges of any kind whatsoever (whether foreseen
or unforeseen), including initial transition and mobilization costs and
demobilization, and other similar wind-down costs, attributable to the
termination of the Company's right to perform the Service Contract.
D-30
District Buy-Out Rights During The Operation Period. The District shall
have the right, on the tenth, twelfth, fourteenth, sixteenth and eighteenth
anniversaries of the Acceptance Date, exercisable in its sole discretion and
without cause, to terminate the Service Contract upon 60 days prior written
notice to the Company. If the District exercises this right to terminate the
Service Contract, the District shall pay the Company a buy-out fee in the amount
stated in the table below, which amounts shall not be escalated. Promptly
following receipt of the District's termination notice, the Company shall
prepare and deliver to the District an invoice for the buy-out-fee payable,
including all required Cost Substantiation. The District shall pay the invoice
within 30 days following receipt thereof.
- --------------------------------------------------------------------------------
Buy-Out-Date Buy-Out Fee
- --------------------------------------------------------------------------------
Tenth Anniversary $ 1,000,000
- --------------------------------------------------------------------------------
Twelfth Anniversary 800,000
- --------------------------------------------------------------------------------
Fourteenth Anniversary 600,000
- --------------------------------------------------------------------------------
Sixteenth Anniversary 400,000
- --------------------------------------------------------------------------------
Eighteenth Anniversary 200,000
- --------------------------------------------------------------------------------
If the Company has provided financing for any Capital Modifications, the
unamortized value thereof based on the financing methodology approved by the
District at the time the financing was effectuated shall also be included in the
buy-out fee.
Significant Uncontrollable Circumstances Buy-Out Right and Fee. In the
event an Uncontrollable Circumstance causes a total constructive loss of the
Project, or in the event an Uncontrollable Circumstance causes an extraordinary
increase in District costs, relating to the Project, in either case due to
events occurring during the Operation Period, the District shall have the right
to terminate the Service Contract upon payment to the Company of the buy-out fee
set forth below. A "total constructive loss" for this purpose shall be deemed to
have occurred: (1) if so determined by the casualty insurance carrier; or (2) if
the Project is substantially inoperable for a period of at least six months
following the occurrence of the Uncontrollable Circumstance. "An extraordinary
increase" in District costs shall be deemed to have occurred for this purpose if
the increase in the Effective Rate for Finished Water in the full Contract Year
following the Contract Year in which the Uncontrollable Circumstance occurred
which would reasonably be expected to result from such occurrence would cause an
increase of more than 20% in the Effective Rate for Finished Water which would
reasonably be expected to be payable in such following Contract Year had no
Uncontrollable Circumstance occurred. Promptly following receipt of the
District's termination notice, the Company shall prepare and deliver to the
District an invoice for the buy-out-fee payable, including all required Cost
Substantiation. The District shall pay the invoice within 30 days following
receipt thereof.
The buy-out fee payable by the District to the Company upon the occurrence
of the Uncontrollable Circumstances described above shall be an amount equal to
(1) if termination occurs on or before the tenth anniversary of the Provisional
Acceptance Date, $2,000,000 or (2) if termination occurs after the tenth
anniversary of the Provisional Acceptance Date, $1,000,000, reduced by 1/120 of
such amount for each month which has elapsed following the tenth anniversary of
the Provisional Acceptance Date to and including the month in which the
Termination Date occurs. Upon any such termination, the Company shall also be
paid all amounts due for the Contract Services to be paid as part of the Service
Fee but not yet paid as of the date of termination.
The District shall have no obligation to pay the applicable termination
fee except concurrently with the surrender of possession and control by the
Company of the Project to the District.
The Company agrees that the applicable buy-out fee shall fully and
adequately compensate the Company and all Subcontractors for all foregone
potential profits, Loss-and-Expense, and charges of any kind whatsoever
D-31
(whether foreseen or unforeseen), including initial transition and mobilization
costs and demobilization, employee transition and other similar wind-down costs,
attributable to the termination of the Company's right to perform the Service
Contract.
Except as otherwise provided in the Service Contract with respect to
survival of certain provisions upon termination hereof, upon and at all times
after any termination of the Service Contract resulting from the District's
exercise of its buy-out rights under the Service Contract, the Company shall be
fully and forever released and discharged of and from all liability and
obligations to the District, the Issuer, the Trustee and the bondholders arising
from or related to the Project, the Service Contract, the Bonds and any and all
other Transaction Documents.
Company Payment of Certain Costs. If termination is pursuant to a Company
Event of Default, or upon the expiration of the Service Contract, the Company
shall be obligated to pay the costs and expenses of undertaking its obligations
upon termination. If the Company fails to comply with any of its obligations
upon termination, the District may perform such obligation and the Company shall
pay on demand all reasonable costs thereof subject to Cost Substantiation.
District Payment of Certain Costs. If termination is for the convenience
of the District or due to a District Event of Default, the District shall pay to
the Company within 45 days of the date of the Company's invoice supported by
Cost Substantiation all reasonable costs and expenses incurred by the Company in
satisfying its obligations upon termination.
Exit Test. The Company, at the request of the District and after
reasonable notice to the Company, shall perform the exit test of the Project for
compliance with the Exit Test Procedures and Standards in the first 90 days of
the 180-day period preceding the end of the Term hereof. If such test shows that
the Project is operating out of compliance with the Exit Test Procedures and
Standards, then within 30 days of such test results, the Company shall submit to
the District a plan for remediation and retesting. The District shall have 30
days to approve such plan, which approval shall not be unreasonably withheld.
The Company shall make all repairs, replacements, renewals and operating changes
and take all other actions which may be necessary to enable the Project to meet
the Exit Test Procedures and Standards. The Project shall then be re-tested to
demonstrate that the necessary corrective action has been taken and the Project
is in compliance with the Exit Test Procedures and Standards. No such testing or
retesting shall relieve the Company of its obligations under the Service
Contract during the performance of the test or retest.
Forum For Dispute Resolution. It is the express intention of the parties
that all Legal Proceedings related to the Service Contract or to the Project or
to any rights or any relationship between the parties arising therefrom shall be
solely and exclusively initiated and maintained in courts of the State located
in Orange County. The Company and the District each irrevocably consents to the
jurisdiction of such courts in any such Legal Proceeding, waives any objection
it may have to the laying of the jurisdiction of any such Legal Proceeding, and
waives its right to a trial by jury.
Non-Binding Mediation. Either party may request Non-Binding Mediation of
any dispute arising under the Service Contract, whether technical or otherwise.
The non-requesting party may decline the request in its sole discretion. If
there is concurrence that any particular matter shall be mediated, the
provisions of the Service Contract relating to Non-Binding Mediation shall
apply. The costs of such Non-Binding Mediation shall be divided equally between
the District and the Company. The Mediator shall be a professional engineer,
attorney or other professional mutually acceptable to the parties who has no
current or past on-going relationship to either party. The Mediator shall have
full discretion as to the conduct of the mediation. Each party shall participate
in the Mediator's program to resolve the dispute until and unless the parties
reach agreement with respect to the disputed matter or one party determines in
its sole discretion that its interests are not being served by the mediation.
Mediation is intended to assist the parties in resolving disputes over the
correct interpretation of the Service Contract. No Mediator shall be empowered
to render a binding decision. None of the provisions summarized in this
paragraph shall operate to limit, interfere with or delay the right of either
party to commence judicial Legal Proceedings upon a breach of the Service
Contract by the other party, whether in lieu of, concurrently with, or at the
conclusion of any Non-Binding Mediation.
D-32
Arbitration. To the extent that the Non-Binding Mediation fails to resolve
any dispute between the parties, and upon mutual agreement of the parties, the
District and the Company may agree to binding arbitration of any dispute which
arises under the Service Contract. Such arbitration shall be governed and
conducted pursuant to the provisions of Section 1281 et seq. of the California
Code of Civil Procedure. None of the provisions summarized in this paragraph
shall operate to limit, interfere with or delay the right of either party to
commence judicial Legal Proceedings upon a breach of the Service Contract by the
other party.
INSURANCE, UNCONTROLLABLE CIRCUMSTANCES AND INDEMNIFICATION
Insurance. At all times during the Term of the Service Contract, the
Company shall obtain and maintain the Required Insurance and shall pay all
premiums with respect thereto as the same become due and payable.
All insurance shall be obtained and maintained from financially sound and
generally recognized responsible insurance companies meeting the qualifications
of the Service Contract. The insurers shall be selected by the Company and
authorized to write such insurance in the State. The insurance coverage may be
written with deductible amounts within the limits allowed in the Service
Contract, and the Company shall be responsible for any deductible amounts. The
Company shall also be responsible for all self insured retentions contained in
its insurance coverages, as well as any excluded losses if such losses are
within the liability of the Company under the Service Contract. All policies
evidencing such insurance shall provide for: (1) payment of the losses to the
District, and to the Company as their respective interests may appear; and (2)
at least 30 days prior written notice of the cancellation thereof to the Company
and the District. All policies of insurance shall be primary insurance without
any right of contribution from other insurance carried by the District.
If the Company fails to pay any premium for Required Insurance, or if any
insurer cancels any Required Insurance policy and the Company fails to obtain
replacement coverage so that the Required Insurance is maintained on a
continuous basis, then, at the District's election (but without any obligation
to do so), the District, following 7 days notice to the Company, may pay such
premium or procure similar insurance coverage from another company or companies
and upon such payment by the District the amount thereof shall be immediately
reimbursable to the District by the Company. The Company shall not perform
Design/Build Work during any period when any policy of Required Construction
Period Insurance is not in effect. The Company shall comply with all applicable
Required Insurance and take all steps necessary to assure the Project remains
continuously insured in accordance with the requirements of the Service Contract
during the Term. The failure of the Company to obtain and maintain any Required
Insurance shall not relieve the Company of its liability for any losses intended
to be insured thereby. Should any failure to provide continuous insurance
coverage occur, the Company shall indemnify and hold harmless the District from
and against any Loss and Expense arising out of such failure. The purchase of
insurance to satisfy the Company's obligations shall not be a satisfaction of
any Company liability under the Service Contract or in any way limit, modify or
satisfy the Company's indemnity obligations under the Service Contract.
Uncontrollable Circumstances. Except as expressly provided under the
Service Contract, neither party to the Service Contract shall be liable to the
other for any loss, damage, delay, default or failure to perform any obligation
to the extent it results from an Uncontrollable Circumstance. The parties agree
that the relief for an Uncontrollable Circumstance described in the Service
Contract shall apply to all obligations in the Service Contract, except to the
extent specifically provided otherwise, notwithstanding that such relief is
specifically mentioned with respect to certain obligations in the Service
Contract but not other obligations. The occurrence of an Uncontrollable
Circumstance shall not excuse or delay the performance of a party's obligation
to pay monies previously accrued and owing under the Service Contract, or to
perform any obligation under the Service Contract not affected by the occurrence
of the Uncontrollable Circumstances. The District shall pay the Service Fee
during the continuance of any Uncontrollable Circumstance, adjusted to account
for any cost reductions achieved through Company mitigation measures required by
the Service Contract, as well as for any cost increases to which the Company is
entitled under the Service Contract. A Contract Administration Memorandum shall
be prepared to confirm and evidence the terms and conditions of the relief given
to the Company on account of any Uncontrollable Circumstances.
If and to the extent that Uncontrollable Circumstances interfere with,
delay or increase the cost of the Company's performance of the Contract Services
in accordance herewith, the Company shall be entitled to an increase in the
Design/Build Price and the Service Fee, and an extension of the Scheduled
Acceptance Date, all as applicable, which properly reflects the interference
with performance, the amount of the increased cost, or the time
D-33
lost as a result thereof, and the Company shall perform all other Contract
Services. The Scheduled Acceptance Date shall be extended only to the extent
that the Uncontrollable Circumstance affects the critical path of the
Design/Build Work. The proceeds of any Required Insurance available to meet any
such increased cost shall be applied to such purpose prior to any determination
of cost increase payable by the District with respect to Uncontrollable
Circumstance. In particular, the Company shall apply the proceeds of Required
Insurance maintained by the Company for builder's risk to the reconstruction of
the Project should an insured event under such builder's risk insurance cause
property damage prior to Acceptance. To the extent there is any cost reduction
achieved through the mitigating measures undertaken by the Company pursuant to
the Service Contract upon the occurrence of an Uncontrollable Circumstance, the
parties shall agree to the amount of the cost reduction and such cost reduction
shall be reflected in a reduction of the amount by which the Design/Build Price
or the Service Fee would have otherwise been increased or shall serve to reduce
the Design/Build Price or the Service Fee to reflect such mitigation measures,
as applicable. In the event that the Company believes it is entitled to any
Design/Build Price, Service Fee or schedule relief on account of any
Uncontrollable Circumstance, it shall furnish the District written notice of the
specific relief requested and detailing the event giving rise to the claim
within 30 days after the giving of notice delivered with respect to the
occurrence of an Uncontrollable Circumstance, or if the specific relief cannot
reasonably be ascertained and such event detailed, within such 30-day period,
then within such longer period with which it is reasonably possible to detail
the event and ascertain such relief. Within 30 days after receipt of such a
timely submission from the Company the District shall issue a written
determination as to the extent, if any, it concurs with the Company claim for
performance, price or schedule relief, and the reasons therefor. The Company
acknowledges that its failure to give timely notice pertaining to an
Uncontrollable Circumstance may adversely affect the District.
Share of Costs of Uncontrollable Circumstances. The Company shall bear the
costs which result from the occurrence of an uninsured Uncontrollable
Circumstance (except any Change in Law made by the District) to the extent of
the first 5% of the costs necessitated by Uncontrollable Circumstances up to an
aggregate of $12,500 per Contract Year, as adjusted annually by the Adjustment
Factor, and an aggregate of $250,000 over the Initial Term of the Service
Contract, as adjusted annually by the Adjustment Factor. Any costs occurring
over future Contract Years as the result of an Uncontrollable Circumstance
occurring in a prior Contract Year shall be treated as Uncontrollable
Circumstance costs occurring in such future Contract Year. The Company's share
of such net costs shall be paid as a lump sum within 60 days of the end of each
Contract Year, unless otherwise agreed by the parties. The Company's obligation
to bear the expense of any deductibles applicable on claims made with respect to
any Required Insurance provided by the Company is an independent obligation, but
the amount of any such expense shall be credited against the Company's
obligation to share in the costs of Uncontrollable Circumstances if the event to
which the Required Insurance responded was an Uncontrollable Circumstance.
Either party's acceptance of any performance, price or schedule relief
shall be construed as a release of the other party for that portion of the
Loss-and-Expense resulting from, or otherwise attributable to, the event giving
rise to the relief claimed.
Indemnification By The Company. The Company shall indemnify, defend and
hold harmless the District, and its elected officials, appointed officers,
employees, representatives, agents and contractors (each, a "District
Indemnitee") and the Trustee and its officers, employees, representatives,
agents and contractors ("Trustee Indemnitee"), from and against (and pay the
full amount of) any and all Loss-and-Expense incurred by a District Indemnitee
or a Trustee Indemnitee to third parties arising from or in connection with (or
alleged to arise from on in connection with): (1) any failure by the Company to
perform its obligations under the Service Contract; or (2) the negligence or
willful misconduct of the Company or any of its officers, directors, employees,
agents, representatives or Subcontractors in connection with the Service
Contract. The Company shall also indemnify the District as and to the extent
provided elsewhere in the Service Contract. The Company's indemnity obligations
under the Service Contract shall not be limited by any coverage exclusions or
other provisions in any insurance policy maintained by the Company which is
intended to respond to such events. The Company shall not, however, be required
to reimburse or indemnify any District Indemnitee or Trustee Indemnitee for any
Loss-and-Expense to the extent caused by the negligence or willful misconduct of
any District Indemnitee or Trustee Indemnitee to the extent attributable to any
Uncontrollable Circumstance. A District Indemnitee or Trustee Indemnitee shall
promptly notify the Company of the assertion of any claim against it for which
it is entitled to be indemnified under the Service Contract, and the Company
shall have the right to assume the defense of the claim in any Legal Proceeding
and to approve any settlement of the claim. These indemnification provisions are
for the protection of the District
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Indemnitee and the Trustee Indemnitee only and shall not establish, of
themselves, any liability to third parties. The indemnification provisions of
the Service Contract shall survive termination of the Service Contract.
Indemnification By The District. The District shall indemnify, defend and
hold harmless the Company, and its elected officials, appointed officers,
employees, representatives, agents and contractors (each, a "Company
Indemnitee"), from and against (and pay the full amount of) any and all
Loss-and-Expense incurred by a Company Indemnitee to third parties arising from
or in connection with (or alleged to arise from on in connection with): (1) any
failure by the District to perform its obligations under the Service Contract;
or (2) the negligence or willful misconduct of the District or any of its
officers, directors, employees, agents, representatives or subcontractors in
connection with the Service Contract. The District shall also indemnify the
Company as and to the extent provided elsewhere in the Service Contract. The
District's indemnity obligations under the Service Contract shall not be limited
by any coverage exclusions or other provisions in any insurance policy
maintained by the District which is intended to respond to such events. The
District shall not, however, be required to reimburse or indemnify any Company
Indemnitee for any Loss-and-Expense to the extent caused by the negligence or
willful misconduct of any Company Indemnitee or to the extent attributable to
any Uncontrollable Circumstance. A Company Indemnitee shall promptly notify the
District of the assertion of any claim against it for which it is entitled to be
indemnified under the Service Contract, and the District shall have the right to
assume the defense of the claim in any Legal Proceeding and to approve any
settlement of the claim. These indemnification provisions are for the protection
of the Company Indemnitee only and shall not establish, of themselves, any
liability to third parties. The indemnification provisions of the Service
Contract shall survive termination of the Service Contract.
SECURITY FOR PERFORMANCE
Service Contract Guaranty Agreement. The Company shall cause the Service
Contract Guaranty Agreement to be provided and maintained by the Guarantor
during the Term in the form attached to the Service Contract as a Transaction
Form.
Construction Performance and Payment Bonds. On or before the Construction
Date, and on or before the date of any Capital Modification (in excess of
$100,000) undertaken by the Company, the Company shall provide the Construction
Performance Bond and the Payment Bond, each in an amount equal to the portion of
the Fixed Design/Build Price relating to the construction work (plus a
reasonable amount to be determined by the parties for any estimated Fixed
Design/Build Price Adjustments), as financial security for the faithful
performance and payment of its Construction Period obligations and Capital
Modification obligations under the Service Contract. The Construction
Performance Bond and the Payment Bond shall be substantially in the form set
forth in the Transaction Forms and shall be issued by a surety company: (1)
approved by the District having a rating of "A" in the latest revision of the
A.M. Best Company's Insurance Report; (2) be listed in the United States
Treasury Department's Circular 570, "Companies Holding Certificates of Authority
as Acceptable Sureties on Federal Bonds and as Acceptable Reinsurance
Companies"; and (3) holding a certificate of authority to transact surety
business in the State issued by the Director of the Department of Insurance. The
Construction Performance Bond and the Payment Bond shall remain open until
Acceptance of the Project.
Service Contract Letter Of Credit. On or before the Bond Issuance Date,
the Company shall provide further security to the District for the performance
of its obligations under the Service Contract to achieve Acceptance through an
irrevocable direct pay letter of credit issued by a United States bank whose
long-term debt is rated "A" or better by either Rating Service and which
maintains a banking office in the State (the "Service Contract Letter of
Credit"). The Service Contract Letter of Credit shall be in a stated amount
equal to daily accrued debt service on the Bonds for a period of 547 days, shall
be for a term of one year, shall be continuously renewed, extended or replaced
so that it remains in effect until 30 days after the date that the District
states in writing that the District and the Independent Engineer concur with the
Company's certification that Acceptance has occurred, and shall be issued
substantially in the form set forth in the Transaction Forms. The stated amount
of the Service Contract Letter of Credit shall in no way limit the amount of
damages to which the District may be entitled for any Company failure to achieve
Acceptance. The Company shall have the right to reduce and replace the stated
amount of the Service Contract Letter of Credit on the 6 month and 12-month
anniversary dates of the Scheduled Acceptance Date by an amount equal to the sum
of all daily delay liquidated damage payments, if any, which the Company has
previously paid to the District. The Service Contract Letter of Credit shall be
surrendered by the City
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for cancellation by the Company on the date that the District states in writing
that the District and the Independent Engineer concur with the Company's
certification that Acceptance has occurred.
The Service Contract Letter of Credit shall authorize the District to draw
the full stated amount thereof: (1) in the event that any required renewal,
extension or replacement thereof is not made earlier than the date which is 30
days prior to its expiration date, or (2) upon certain events of bankruptcy or
insolvency of the Company or the Guarantor described in the drawing certificate
attached thereto. The proceeds of any such drawings shall be held by the
District as cash collateral to secure the performance of the Contract Services
and, in the event of a material breach of the Service Contract following any
such drawing, may be retained by the District as payment of damages resulting
therefrom. The Service Contract Letter of Credit shall also authorize the
District to draw an amount representing delay liquidated damages due the
District.
The cost and expense of obtaining and maintaining the Security Instruments
required under the Service Contract as security for the performance of the
Company's obligations under the Service Contract shall be borne by the Company
without reimbursement from the District.
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APPENDIX E
FORM OF CONTINUING DISCLOSURE AGREEMENT
CONTINUING DISCLOSURE AGREEMENT
THIS CONTINUING DISCLOSURE AGREEMENT (this "Disclosure Agreement"), dated
as of January ___, 2003, is by and between BNY WESTERN TRUST COMPANY, a state
banking company duly organized and validly existing under the laws of the State
of California, as Trustee (the "Trustee"), and the CAPISTRANO VALLEY WATER
DISTRICT, a county water district organized and existing under and by virtue of
the laws of the State of California (the "Water District").
W I T N E S S E T H :
WHEREAS, the Water District has caused to be executed and delivered San
Juan Basin Authority Lease Revenue Bonds (Ground Water Recovery Project) Issue
of 2002 (the "Bonds"), evidencing principal in the aggregate amount of
$31,555,000, pursuant to a Trust Agreement, dated as of the date hereof (the
"Trust Agreement"), by and among the Trustee, the San Juan Basin Authority and
the Water District; and
WHEREAS, this Disclosure Agreement is being executed and delivered by the
Water District and the Trustee for the benefit of the holders and beneficial
owners of the Bonds and in order to assist the underwriters of the Bonds in
complying with S.E.C. Rule 15c2-12(b)(5);
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants herein contained, the parties hereto agree as follows:
Section 1. Definitions. In addition to the definitions set forth in the
Trust Agreement, which apply to any capitalized term used in this Disclosure
Agreement unless otherwise defined in this Section, the following capitalized
terms shall have the following meanings:
"Annual Report" means any Annual Report provided by the Water District
pursuant to, and as described in, Sections 2 and 3 hereof.
"Disclosure Representative" means the General Manager of the Water
District and the Administrative Services Director of the Water District, or such
other officer or employee of the Water District as the Water District shall
designate in writing to the Trustee from time to time.
"Dissemination Agent" means the Trustee, acting in its capacity as
Dissemination Agent hereunder, or any successor Dissemination Agent designated
in writing by the Water District and which has filed with the Trustee a written
acceptance of such designation.
"Listed Events" means any of the events listed in subsection (a) of
Section 4 hereof.
"National Repository" means any Nationally Recognized Municipal Securities
Information Repository for purposes of the Rule.
"Official Statement" means the Official Statement, dated December 11,
2002, relating to the Bonds.
"Participating Underwriter" means any of the original underwriters of the
Bonds required to comply with the Rule in connection with the offering of the
Bonds.
"Repository" means each National Repository and each State Repository.
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"Rule" means Rule 15c2-12(b)(5) adopted by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as the same may be amended
from time to time.
"State Repository" means any public or private repository or entity
designated by the State of California as a state repository for the purpose of
the Rule and recognized by the Securities and Exchange Commission. As of the
date of this Disclosure Agreement, there is no State Repository.
Section 2. Provision of Annual Reports, (a) The Water District shall, or
shall cause the Dissemination Agent to, not later than the date that is nine
months after the end of the Water District's fiscal year (which date currently
would be April 1), commencing with the report for the 2001-02 Fiscal Year,
provide to each Repository an Annual Report which is consistent with the
requirements of Section 3 hereof. The Annual Report may be submitted as a single
document or as separate documents comprising a package, and may include by
reference other information as provided in Section 3 hereof; provided that the
audited financial statements of the Water District may be submitted separately
from the balance of the Annual Report, and later than the date required above
for the filing of the Annual Report if not available by that date. If the Water
District's fiscal year changes, it shall give notice of such change in the same
manner as for a Listed Event under subsection (f) of Section 4 hereof.
(b) Not later than 15 business days prior to the date specified in
subsection (a) of this Section for the providing of the Annual Report to the
Repositories, the Water District shall provide the Annual Report to the
Dissemination Agent and the Trustee (if the Trustee is not the Dissemination
Agent). If by such date, the Trustee has not received a copy of the Annual
Report, the Trustee shall contact the Water District and the Dissemination Agent
to determine if the Water District is in compliance with the first sentence of
this subsection (b).
(c) If the Trustee is unable to confirm that an Annual Report has been
provided to Repositories by the date required in subsection (a) of this Section,
the Trustee shall send a notice to the Municipal Securities Rulemaking Board and
each State Repository, if any, in substantially the form attached as Exhibit A.
(d) The Dissemination Agent shall:
(i) determine each year prior to the date for providing the Annual
Report the name and address of each National Repository and each State
Repository, if any; and
(ii) file a report with the Water District and (if the
Dissemination Agent is not the Trustee) the Trustee certifying that the
Annual Report has been provided pursuant to this Disclosure Agreement,
stating the date it was provided and listing all the Repositories to which
it was provided.
Section 3. Content of Annual Reports. The Water District's Annual Report
shall contain or incorporate by reference the following:
(a) Audited financial statements prepared in accordance with
generally accepted accounting principles as promulgated to apply to
governmental entities from time to time by the Governmental Accounting
Standards Board. If the Water District's audited financial statements are
not available by the time the Annual Report is required to be filed
pursuant to subsection (a) of Section 2 hereof, the Annual Report shall
contain unaudited financial statements in a format similar to the
financial statements contained in the Official Statement, and the audited
financial statements shall be filed in the same manner as the Annual
Report when they become available.
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(b) The following information with respect to the Bonds:
(i) The Outstanding principal of the Bonds as of the January
1 next preceding the date of such Annual Report and the principal
amount of any Parity Obligations outstanding as of the January 1
next preceding the date of such Annual Report.
(ii) The balance in the Reserve Fund, and a statement of the
Reserve Requirement, as of the January 1 next preceding the date of
such Annual Report.
(iii) The outstanding principal evidenced by the San Juan
Capistrano Public Financing Authority Revenue Certificates of
Participation, Series 2002, preceding the date of such Annual Report
and the principal amount of any obligations on a parity to such
certificates of participation outstanding as of the January 1 next
preceding the date of such Annual Report.
(c) A summary report showing in reasonable detail Revenues,
Maintenance and Operation Costs, Net Revenues and Debt Service for the
Fiscal Year ended the immediately preceding June 30, which report shall be
substantially in the form of Table 9 in the Official Statement.
(d) An update of the information contained in Tables 1, 2, 3, 4,
5, 6, and 7 in the Official Statement for the Fiscal Year ended the
immediately preceding June 30.
(e) Prior to Acceptance (as defined in the Service Contract), an
update of the completion of the milestones set forth in Appendix 21 of the
Service Contract for the Design, Construction, Financing and Operation of
the San Juan Basin Desalter Project, dated September 3,2002 (the "Service
Contract"), between the Water District and Eco Resources, Inc.
(f) In addition to any of the information expressly required to be
provided under subsections (a), (b), (c), (d) and (e) of this Section, the
Water District shall provide such further information, if any, as may be
necessary to make the specifically required statements, in the light of
the circumstances under which they are made, not misleading.
Any or all of the items listed above may be included by specific reference
to other documents, including official statements of debt issues of the Water
District or related public entities, which have been submitted to each of the
Repositories or the Securities and Exchange Commission. If the document included
by reference is a final official statement, it must be available from the
Municipal Securities Rulemakmg Board. The Water District shall clearly identify
each such other document so included by reference.
Section 4. Reporting of Significant Events, (a) Pursuant to the provisions
of this Section, the Water District shall give, or cause to be given, notice of
the occurrence of any of the following events with respect to the Bonds, if
material:
(1) Principal and interest payment delinquencies.
(2) Non-payment related defaults.
(3) Unscheduled draws on debt service reserves reflecting
financial difficulties.
(4) Unscheduled draws on credit enhancements reflecting financial
difficulties.
(5) Substitution of credit or liquidity providers, or their
failure to perform.
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(6) Adverse tax opinions or events affecting the tax-exempt status
of the security.
(7) Modifications to rights of security holders.
(8) Contingent or unscheduled Bond calls.
(9) Defeasances.
(10) Release, substitution, or sale of property securing repayment
of the securities.
(11) Rating changes.
(b) The Trustee shall, within one business day of obtaining actual
knowledge of the occurrence of any of the Listed Events, contact the Disclosure
Representative, inform such person of the event, and request that the Water
District promptly notify the Trustee in writing whether or not to report the
event pursuant to subsection (f) of this Section.
(c) Whenever the Water District obtains knowledge of the occurrence of a
Listed Event, whether because of a notice from the Trustee pursuant to
subsection (b) of this Section or otherwise, the Water District shall as soon as
possible determine if such event would be material under applicable Federal
securities law.
(d) If the Water District has determined that knowledge of the
occurrence of a Listed Event would be material under applicable Federal
securities law, the Water District shall promptly notify the Trustee in writing.
Such notice shall instruct the Trustee to report the occurrence pursuant to
subsection (f) of this Section.
(e) If in response to a request under subsection (b) of this Section,
the Water District determines that the Listed Event would not be material under
applicable Federal securities law, the Water District shall so notify the
Trustee in writing and instruct the Trustee not to report the occurrence
pursuant to subsection (f) of this Section.
(f) If the Trustee has been instructed by the Water District to report
the occurrence of a Listed Event, the Trustee shall file a notice of such
occurrence with the Municipal Securities Rulemaking Board and each State
Repository. Notwithstanding the foregoing, notice of Listed Events described in
paragraphs (8) and (9) of subsection (a) of this Section need not be given under
this subsection any earlier than the notice (if any) of the underlying event is
given to holders of affected Bonds pursuant to the Trust Agreement.
Section 5. Termination of Reporting Obligation. The Water District's
obligations under this Disclosure Agreement shall terminate upon the legal
defeasance, prior redemption or payment in full of all of the Bonds. If such
termination occurs prior to the final maturity of the Bonds, the Water District
shall give notice of such termination in the same manner as for a Listed Event
under subsection (f) of Section 4 hereof.
Section 6. Dissemination Agent. The Water District may, from time to time,
appoint or engage a Dissemination Agent to assist it in carrying out its
obligations under this Disclosure Agreement, and may discharge any such
Dissemination Agent, with or without appointing a successor Dissemination Agent.
If at any time there is not any other designated Dissemination Agent, the
Trustee shall be the Dissemination Agent; provided it shall receive written
notice of such designation at the time of such designation.
Section 7. Amendment; Waiver. Notwithstanding any other provision of this
Disclosure Agreement, the Water District and the Trustee may amend this
Disclosure Agreement (and the Trustee
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shall agree to any amendment so requested by the Water District), and any
provision of this Disclosure Agreement may be waived, provided that the
following conditions are satisfied:
(a) if the amendment or waiver relates to the provisions of
subsection (a) of Section 2 hereof, Section 3 hereof or subsection (a) of
Section 4 hereof, it may only be made in connection with a change in
circumstances that arises from a change in legal requirements, change in
law, or change in the identity, nature or status of an obligated person
with respect to the Bonds, or type of business conducted;
(b) the undertakings herein, as proposed to be amended or waived,
would, in the opinion of nationally recognized bond counsel, have complied
with the requirements of the Rule at the time of the primary offering of
the Bonds, after taking into account any amendments or interpretations of
the Rule, as well as any change in circumstances; and
(c) the proposed amendment or waiver (i) is approved by holders of
the Bonds in the manner provided in the Trust Agreement for amendments to
the Trust Agreement with the consent of holders, or (ii) does not, in the
opinion of the Trustee or nationally recognized bond counsel, materially
impair the interests of holders.
If the annual financial information or operating data to be provided in
the Annual Report is amended pursuant to the provisions hereof, the annual
financial information containing the amended operating data or financial
information shall explain, in narrative form, the reasons for the amendment and
the impact of the change in the type of operating data or financial information
being provided.
If an amendment is made to the undertaking specifying the accounting
principles to be followed in preparing financial statements, the annual
financial information for the year in which the change is made shall present a
comparison between the financial statements or information prepared on the basis
of the new accounting principles and those prepared on the basis of the former
accounting principles. The comparison shall include a qualitative discussion of
the differences in the accounting principles and the impact of the change in the
accounting principles on the presentation of the financial information, in order
to provide information to investors to enable them to evaluate the ability of
the Water District to meet its obligations. To the extent reasonably feasible,
the comparison shall be quantitative. A notice of the change in the accounting
principles shall be sent to the Repositories.
Section 8. Additional Information. Nothing in this Disclosure Agreement
shall be deemed to prevent the Water District from disseminating any other
information, using the means of dissemination set forth in this Disclosure
Agreement or any other means of communication, or including any other
information in any Annual Report or notice of occurrence of a Listed Event, in
addition to that which is required by this Disclosure Agreement. If the Water
District chooses to include any information in any Annual Report or notice of
occurrence of a Listed Event in addition to that which is specifically required
by this Disclosure Agreement, the Water District shall have no obligation under
this Disclosure Agreement to update such information or include it in any future
Annual Report or notice of occurrence of a Listed Event.
Section 9. Default. In the event of a failure of the Water District, the
Trustee or the Dissemination Agent to comply with any provision of this
Disclosure Agreement, the Trustee may (and, at the written direction of any
Participating Underwriter or the holders of at least 25% of the aggregate amount
of Outstanding principal of Bonds, shall), or any holder or beneficial owner of
the Bonds may, take such actions as may be necessary and appropriate, including
seeking mandate or specific performance by court order, to cause the Water
District, Trustee or the Dissemination Agent, as the case may be, to comply with
its obligations under this Disclosure Agreement. A default under this Disclosure
Agreement shall not be deemed an Event of Default under the Trust Agreement, and
the sole remedy under this Disclosure Agreement in the event of any failure of
the Water District, the Trustee or the
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Dissemination Agent to comply with this Disclosure Agreement shall be an action
to compel performance.
Section 10. Duties, Immunities and Liabilities of Trustee and
Dissemination Agent. Article VIII of the Trust Agreement is hereby made
applicable to this Disclosure Agreement as if this Disclosure Agreement were
(solely for this purpose) contained in the Trust Agreement. Neither the Trustee
nor the Dissemination Agent shall be responsible for the form or content of any
Annual Report or notice of Listed Event. The Dissemination Agent shall receive
reasonable compensation for its services provided under this Disclosure
Agreement. The Dissemination Agent (if other than the Trustee or the Trustee in
its capacity as Dissemination Agent) shall have only such duties as are
specifically set forth in this Disclosure Agreement, and the Water District
agrees to indemnify and save the Dissemination Agent, its officers, directors,
employees and agents, harmless against any loss, expense and liabilities which
it may incur arising out of or in the exercise or performance of its powers and
duties hereunder, including the costs and expenses (including attorneys fees) of
defending against any claim of liability, but excluding liabilities due to the
Dissemination Agent's negligence or willful misconduct. The obligations of the
Water District under this Section shall survive resignation or removal of the
Dissemination Agent and payment of the Bonds.
SECTION 11. BENEFICIARIES. This Disclosure Agreement shall inure solely to
the benefit of the Water District, the Trustee, the Dissemination Agent, the
Participating Underwriter and holders and beneficial owners from time to time of
the Bonds, and shall create no rights in any other person or entity.
SECTION 12. COUNTERPARTS. This Disclosure Agreement may be executed in
several counterparts, each of which shall be an original and all of which shall
constitute but one and the same Instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Disclosure
Agreement as of the date first above written.
CAPISTRANO VALLEY WATER
DISTRICT
By:
------------------------------
BNY WESTERN TRUST COMPANY, AS
TRUSTEE
By:
------------------------------
Authorized Signatory
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EXHIBIT A
NOTICE TO MUNICIPAL SECURITIES RULEMAKING BOARD OF FAILURE
TO FILE ANNUAL REPORT
Name of Issuer: Capistrano Valley Water District
Name of Issue: San Juan Basin Authority Lease Revenue Bonds (Ground Water
Recovery Project) Issue of 2002
Date of Issuance: January _, 2003
NOTICE IS HEREBY GIVEN that the Capistrano Valley Water District (the
"Water District") has not provided an Annual Report with respect to the
above-named Bonds as required by Section 6.09 of the Trust Agreement, dated as
of December 1, 2002, by and among BNY Western Trust Company, as Trustee, the San
Juan Basin Authority and the Water District. [The Water District anticipates
that the Annual Report will be filed by___________________.]
Dated:
----------------
BNY Western Trust Company, as
Trustee, on behalf of the
Capistrano Valley Water District
cc: Capistrano Valley Water District
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(This Page Intentionally Left Blank)
APPENDIX F
PROPOSED FORM OF BOND COUNSEL OPINION
[Closing Date]
San Juan Basin Authority
San Juan Capistrano, California
Re: $31,555,000 San Juan Basin Authority Lease Revenue Bonds (Ground
Water Recovery Project) Issue of 2002
Members of the Authority:
We have acted as bond counsel to the San Juan Basin Authority (the
"Authority") in connection with the issuance by the Authority of $31,555,000 San
Juan Basin Authority Lease Revenue Bonds (Ground Water Recovery Project) Issue
of 2002 (the "Bonds"), pursuant to the provisions of Article 4 (commencing with
Section 6584) of Chapter 5 of Division 7 of Title 1 of the California Government
Code (the "Bond Law"), and pursuant to a Trust Agreement dated as of December 1,
2002 (the "Trust Agreement"), by and among the Authority, the Capistrano Valley
Water District (the "Water District") and BNY Western Trust Company, as Trustee.
The Bonds will be principally secured by lease payments to be made by the Water
District pursuant to a Lease Agreement dated as of December 1, 2002 (the
"Lease"), by and between the Authority and the Water District. We have examined
the law and such certified proceedings and other documents as we deem necessary
to render this opinion. This opinion is based on current statutory and
constitutional law and published court decisions as of the date hereof.
Capitalized terms used herein and not otherwise defined shall have the meaning
ascribed thereto in the Trust Agreement.
As to questions of fact material to our opinion, we have relied upon
representations of the Authority contained in the Trust Agreement and in the
certified proceedings and certifications of public officials and others
furnished to us, without undertaking to verify the same by independent
investigation.
Based upon the foregoing we are of the opinion, under existing law, as
follows:
1. The Authority is a joint exercise of powers authority duly organized
and validly existing under the laws of the State of California with the full
power to enter into the Trust Agreement and the Lease, to perform the agreements
on its part contained therein and to issue the Bonds.
2. The Trust Agreement, the Lease and the Property Lease have each been
duly approved by the Authority and constitute the valid and binding obligations
of the Authority enforceable against the Authority in accordance with their
respective terms. The Trust Agreement
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San Juan Basin Authority
[Closing Date]
Page Two
creates a valid express and irrevocable trust of the Trust Estate, subject
to the provisions of the Trust Agreement permitting the application thereof for
the purposes and subject to the terms and conditions set forth in the Trust
Agreement.
3. The Bonds have been duly authorized and issued by the Authority and
are valid and binding special obligations of the Authority, payable solely from
the Trust Estate.
4. The Lease has been duly approved by the Water District, constitutes
the valid and binding obligation of the Water District enforceable against the
Water District in accordance with its terms and creates a valid pledge of
Revenues pursuant to the terms thereof. Except for the pledge of Revenues to the
payment of Lease Payments pursuant to the terms of the Lease, neither the faith
and credit nor the taxing power of the Water District, the City of San Juan
Capistrano, the State of California or any political subdivision thereof is
pledged to the payment of Lease Payments.
5. Under existing statutes, regulations, rulings and judicial
decisions, interest on the Bonds is excluded from gross income for federal
income tax purposes and is not an item of tax preference for purposes of
calculating the federal alternative minimum tax imposed on individuals and
corporations; however, it should be noted that, with respect to corporations,
such interest may be included as an adjustment in the calculation of alternative
minimum taxable income, which may affect the alternative minimum tax liability
of corporations.
6. Interest on the Bonds is exempt from State of California personal
income tax.
7. The difference between the issue price of a Bond (the first price at
which a substantial amount of the Bonds of a maturity is to be sold to the
public) and the stated redemption price at maturity with respect to such Bonds
constitutes original issue discount. Original issue discount accrues under a
constant yield method, and original issue discount will accrue to a Bondowner
before receipt of cash attributable to such excludable income. The amount of
original issue discount deemed received by a Bondowner will increase the
Bondowner's basis in the applicable Bond. Original issue discount that accrues
to the Bondowner is excluded from the gross income of such owner for federal
income tax purposes, is not an item of tax preference for purposes of the
federal alternative minimum tax imposed on individuals and corporations, and is
exempt from State of California personal income tax.
8. The amount by which a Bondowner's original basis for determining
loss on sale or exchange in the applicable Bond (generally, the purchase price)
exceeds the amount payable on maturity (or on an earlier call date) constitutes
amortizable Bond premium, which must be amortized under Section 171 of the Code;
such amortizable Bond premium reduces the Bondowner's basis in the applicable
Bond (and the amount of tax-exempt interest received), and is not deductible for
federal income tax purposes. The basis reduction as a result of the amortization
of Bond premium may result in a Bondowner realizing a taxable gain when a Bond
is sold by the owner for an amount equal to or less (under certain
circumstances) than the original cost of the Bond to the owner. Purchasers of
the Bonds should consult their own tax advisors as to the treatment, computation
and collateral consequences of amortizable Bond premium.
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San Juan Basin Authority
[Closing Date]
Page Three
The opinions expressed herein may be affected by actions taken (or not
taken) or events occurring (or not occurring) after the date hereof. We have not
undertaken to determine, or to inform any person, whether any such actions or
events are taken or do occur. In rendering this opinion, we have relied upon
certain representations of fact and certifications made by the Authority, the
Water District, the initial purchaser of the Bonds and others. We have not
undertaken to verify through independent investigation the accuracy of the
representations and certifications relied upon by us. The Trust Agreement, the
Lease and the Tax Certificate relating to the Bonds permit certain actions to be
taken or to be omitted if a favorable opinion of Bond Counsel is provided with
respect thereto. No opinion is expressed herein as to the exclusion from gross
income of interest (and original issue discount) for federal income tax purposes
with respect to any Bond if any such action is taken or omitted based upon the
advice of counsel other than ourselves. Other than as expressly stated herein,
we express no opinion regarding tax consequences with respect to the Bonds.
The opinions expressed herein as to the exclusion from gross income of
interest (and original issue discount) on the Bonds are based upon certain
representations of fact and certifications made by the Authority, the Water
District and others and are subject to the condition that the Authority and the
Water District comply with all requirements of the Internal Revenue Code of
1986, as amended (the "Code"), that must be satisfied subsequent to the issuance
of the Bonds to assure that such interest (and original issue discount) will not
become includable in gross income for federal income tax purposes. Failure to
comply with such requirements of the Code might cause interest (and original
issue discount) on the Bonds to be included in gross income for federal income
tax purposes retroactive to the date of issuance of the Bonds. The Authority and
the Water District have covenanted to comply with all such requirements.
With respect to the opinions expressed herein, the rights and obligations
under the Trust Agreement, the Lease and the Bonds are subject to bankruptcy,
insolvency, fraudulent conveyance or transfer, moratorium and other laws
affecting the enforcement of creditors' rights, to the application of equitable
principles if equitable remedies are sought, to the exercise of judicial
discretion in appropriate cases and to the limitations on legal remedies against
public agencies in the State of California.
We have not made or undertaken to make an investigation of the state of
title to any of the real property described in the Lease or of the accuracy or
sufficiency of the description of such property contained therein, and we
express no opinion with respect to such matters.
We express no opinion herein as to the accuracy, completeness or
sufficiency of the Official Statement relating to the Bonds or other offering
material relating to the Bonds, and purchasers of the Bonds should not assume
that we have reviewed the Official Statement.
Respectfully submitted,
F-3
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APPENDIX G
INDEPENDENT ENGINEER'S REPORT
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Updated
Independent Engineer's Report
CAPISTRANO VALLEY WATER DISTRICT
PHASE 1 DESALTER PROJECT
DECEMBER 6, 2002
Prepared by:
PSOMAS
3187 Red Hill Avenue, Suite 250
Costa Mesa, CA 92626
(714) 751-7373
[SEAL]
/s/Michael D. Swan
---------------------------
Michael D. Swan P.E. 25737
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
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TABLE OF CONTENTS
I. PROJECT PARTICIPANTS................................................... 1
1.1 Introduction..................................................... 1
1.2 Capistrano Valley Water District................................. 3
1.3 Independent Engineer............................................. 3
1.4 Design-Build, and Operate Team................................... 4
1.4.1 Southwest Water Company.................................... 4
1.4.2 ECO Resources, Inc......................................... 5
1.4.3 Boyle Engineering ......................................... 6
1.4.4 Osmonics .................................................. 6
1.4.5 ARB, Inc .................................................. 7
II. PROCESS TECHNOLOGY..................................................... 11
2.1 Process.......................................................... 11
2.1.1 Pre-treatment ............................................. 11
2.1.2 Desalting.................................................. 12
2.1.3 Post-treatment ............................................ 12
Figure 2.1 Process Legend and Block Flow Diagram......... ....... 14
III. PROJECT SITE........................................................... 15
3.1 Site Description................................................. 15
3.2 Offsite Facilities............................................... 15
3.3 Site Conditions.................................................. 16
3.3.1 RO Facility ............................................... 16
3.3.2 Well Sites, Pump Station and Pipelines..................... 17
3.3.3 Groundwater Basins......................................... 18
3.3.4 California Environmental Quality Act Mitigation............ 19
Figure 3.1 WTP Site Layout....................................... 21
Figure 3.2 Well Collection System Schematic Alignment............ 23
Figure 3.3 Treated Water and RO Disposal Pipelines............... 27
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TABLE OF CONTENTS
(CONTINUED)
IV. ENGINEERING, PROCUREMENT AND CONSTRUCTION...............................29
4.1 Conceptual Design Parameters......................................29
4.2 Engineering Design................................................30
4.3 Major Equipment-Well Sites........................................31
4.4 Major Equipment-Pre-treatment.....................................32
4.5 Major Equipment-Reverse Osmosis...................................32
4.6 Major Equipment-Post-treatment....................................33
4.7 Contractor's Scope of Work........................................33
4.8 Acceptance Test/Provisional Acceptance............................35
V. OPERATION AND MAINTENANCE...............................................37
5.1 Proposed Operation of the Facility................................37
5.2 Maintenance Management............................................38
VI. ENVIRONMENTAL AND REGULATORY REQUIREMENTS...............................41
6.1 Major Permitting and Regulatory Requirements......................41
6.1.1 Construction Permit.........................................41
6.1.2 Operation Permit ...........................................41
6.2 Safety Plan.......................................................42
6.3 Security Plan.....................................................43
VII. RELEVANT PROJECT CONTRACTS/AGREEMENTS...................................45
7.1 Project Implementation Agreement..................................45
7.2 Metropolitan Water District of Southern California
Project Agreement.................................................45
7.3 Service Contract................................. ................47
7.3.1 Construction ...............................................47
7.3.2 Acceptance Testing and Requirements.........................47
7.3.3 MWD Agreement ..............................................50
7.3.4 Operation ..................................................50
7.3.5 Performance Guarantees......................................50
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TABLE OF CONTENTS
(CONTINUED)
7.3.6 District's Remedies for Non-compliance with Performance
Guarantees..................................................52
7.3.7 Releases, Leaks and Spills..................................52
7.4 Service Contract Guaranty Agreement...............................52
7.5 Property Lease....................................................53
7.6 Lease Agreement...................................................53
7.7 Trust Agreement...................................................54
7.8 Osmonics Contract.................................................55
7.9 Agreement for Construction - ARB,Inc..............................55
VIII. PROJECT SCHEDULE AND COSTS..............................................57
8.1 Engineering, Procurement, Construction Schedule and Costs.........57
8.1.1 Construction Schedule.......................................57
8.1.2 Construction Costs..........................................58
8.2 Operations and Maintenance Costs..................................59
8.2.1 Base Operating Charge.......................................60
8.2.2 Extraordinary Items Charge or Credit........................60
8.2.3 Adjustment Factor ..........................................60
8.3 Project Cost Projections..........................................61
8.4 Project Cost Projection Schedule..................................62
IX. ASSUMPTIONS AND CONSIDERATIONS USED.....................................67
9.1 Assumptions.......................................................67
X. CONCLUSIONS.............................................................69
10.1 Conclusions.......................................................69
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I. PROJECT PARTICIPANTS
1.1 INTRODUCTION
The Capistrano Valley Water District (District) selected ECO Resources,
Inc. (ECO) to assemble and lead a multi-disciplined team to design,
construct, and operate a brackish groundwater treatment facility, raw
water supply well sites (well sites), and raw water supply and concentrate
discharge pipelines (pipelines), (collectively known as the Project) for
the construction and twenty-year Operation Period of the Service Contract,
which includes options to extend. The Project will be funded by tax-exempt
governmental purpose bonds (Bonds) with a thirty-two year final maturity.
Once constructed, the Project will supply nearly one-half of the
District's annual water supply requirements and assist the District in
meeting its goal of securing fifty-percent of its annual supply from local
groundwater sources.
The Service Contract provides for ECO to design, construct, and operate a
5.14-million gallon per day (MGD) brackish groundwater treatment facility
utilizing the reverse osmosis (RO) process, related well sites and
pipelines in the City of San Juan Capistrano, California (City) for the
District. The total Project includes wells, distribution pipelines from
the wells to the RO Facility, a pump station and pipeline to convey the
treated water to the District's water collection system, facilities to
convey the process concentrate to the South East Regional Reclamation
Authority (SERRA) Ocean Outfall, and construction of the Strawberry Hill
Booster Pumping Station to connect the District's 350 water distribution
pressure zone with the 425 pressure zone. As further described in Section
IV of this Report, the RO Facility includes: the de-sanding equipment,
iron and manganese filters, RO units, backwash tanks and equipment,
degasifiers and related piping, equipment, pumps and buildings.
Pursuant to the terms and conditions contained in the Insurance and
Indemnity Agreement, ECO will agree that within six months after the date
the Bonds are issued, ECO will, for the benefit of the Bond Insurer,
assign all of its rights in and to, and delegate all of its obligations
under, the Service Contract and the Insurance and Indemnity Agreement to a
wholly owned subsidiary of ECO that satisfies certain corporate separation
requirements set forth in the Insurance and Indemnity Agreement (Special
Purpose Entity or SPE) and shall cause the SPE to assume all of the
obligations of ECO under the Service Contract and Insurance and Indemnity
Agreement. Upon such assignment, ECO will be released from all of its
obligations under the Service Contract and the Insurance and Indemnity
Agreement, and the Insurance and Indemnity Agreement Guaranty will extend
to such obligations of the SPE following such assignment. In the Insurance
and Indemnity Agreement, the Bond Insurer and the District consent to such
assignment. ECO will simultaneously enter into a management and
administrative services agreement (A&A Agreement) with the SPE for a term
equal to the term of the Service Contract, whereby ECO will provide
management and administrative services necessary to support the SPE's
performance of its obligations under the Service Contract, including the
construction and operation of the Service Contract Project Improvements.
Accordingly, as used in this Report, the term
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"DB/Operator" shall mean ECO before such assignment and shall mean the SPE
thereafter.
The DB/Operator is required to furnish up to 5,231 acre-feet of treated
water to the District on an annual basis. The fixed annual fee (Service
Fee) however, is based upon a projected demand of 4,800 acre-feet per year
(AFY). The District will have no obligation to demand water from the
DB/Operator but will be required to pay the Service Fee and Lease Payments
regardless of the amount of water demanded. If the District demands
treated water in excess of 4,800 AFY, the DB/Operator will be paid on a
unit basis for each acre-foot of water demanded above 4,800 AFY.
The Metropolitan Water District of Southern California (MWD), which
supplies the remainder of the District's requirements, entered into an
agreement in December 1998 with the Municipal Water District of Orange
County (MWDOC) and the San Juan Basin Authority (Authority) under MWD's
Groundwater Recovery Program (GRP). The GRP, as an incentive to develop
alternative water sources for the Southern California area, will provide a
subsidy in the amount up to $250 per AFY for alternative sources of
domestic potable water./1/ There is an Implementation Agreement, approved
October 15, 2002, between the Authority and the District to delegate and
assign the obligation to develop the proposed San Juan Basin Desalter
Project (Project) and subsequent ownership of the Project to the
Authority, subject to an operating lease with the District. The
Implementation Agreement establishes that the District is allocated the
right to extract approximately 5,800 AFY of groundwater to be used in the
production of 4,800 AFY of Finished Water. Under the Implementation
Agreement, the right to the MWD GRP annual subsidy of up to $250 per
acre-foot of treated potable groundwater produced is irrevocably committed
to the Project, if specific performance requirements relating to the
construction start date and the production of Finished Water are obtained.
Refer to Section VII of this Report for further discussion of the MWD
performance requirements.
The District's Domestic Water Master Plan (Domestic Master Plan), dated
May 1999 provides for the local distribution of potable water. The primary
function of the Domestic Master Plan is to identify the facilities that
will provide adequate supply, storage, fire flow and increase system
reliability, and a key component of the Domestic Master Plan is the
Project. Once constructed and fully operational, it is anticipated that
the Project will supply a minimum of 4,800 AFY, which is approximately
one-half of the District's annual water supply requirement from local
groundwater sources. This will reduce the need to rely on additional
imported water capacity and avoid the cost associated with the imported
water. Additionally, the development of local groundwater sources in
connection with the operation of the Project will eliminate the need for
additional operational and emergency storage. The additional storage
requirement is estimated, by the District, at 41-million gallons (MG). The
District estimates the present value savings at $21-million with the
implementation of this Project.
/1/ Capistrano Valley Water District, as a member of the San Juan Basin
Authority, will be implementing the Agreement.
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The capitalized undefined terms used herein have the same meaning as set
forth in the Service Contract, the Lease Agreement, and the Trust
Agreement, which terms are summarized in the Official Statement relating
to the Bonds.
1.2 CAPISTRANO VALLEY WATER DISTRICT
The District was formed in 1930 and was under the control of the Orange
County Board of Supervisors until 1970, at which time it became a
subsidiary district of the City. In 1997, an Operations and Maintenance
Agreement was approved whereby the District is operated by the City's
Public Works Department.
The District services an area of approximately 18 square miles, mostly
within the incorporated boundaries of San Juan Capistrano, which primarily
consists of residential and open space land use. Strip commercial
developments make up approximately three percent of the total service
area. The service area population is projected to increase from
approximately 35,500 at present to 41,725 by 2020. Elevations within the
District vary from 15 feet to 880 feet above mean sea level. The District
water system consists of 7 distinct pressure zones defined by reservoirs,
and 26 sub-pressure zones served through pressure regulating stations and
hydro pneumatic systems. The system contains 174 miles of pipelines, 11
reservoirs, 10 booster pump stations and approximately 10,777 active water
services.
1.3 INDEPENDENT ENGINEER
The Trustee, on behalf of the bondholders, has retained PSOMAS, a
California Corporation, to prepare this Independent Engineer's Report. In
addition, PSOMAS will assist in connection with oversight of the design
and construction of the Project and the disbursement of Bond proceeds. In
the performance of these services, PSOMAS will: review and monitor
construction progress; review proposed changes to Design Requirements;
review project plans, drawings and specifications for compliance with
Design Requirements; monitor the Acceptance Tests undertaken by the
DB/Operator and review the DB/Operator's certified Acceptance Test Report
to determine compliance with the Service Contract; review the
DB/Operator's milestone payment requests and perform other such duties as
may be specifically conferred on the Independent Engineer.
Founded in 1946 by George Psomas, PSOMAS has grown into a full-service
consulting engineering firm with approximately 450 employees in eight
offices throughout California and one office in Salt Lake City, Utah.
PSOMAS is a leading employee-owned consulting engineering firm offering
services in water and natural resources, land development, public works,
survey and information systems to public and private sector clients. The
firm is currently ranked 134 on Engineering News Record's Top Engineering
Firms. Relevant to this Project, PSOMAS' annual revenues in water
resources are over $15 million.
PSOMAS also has extensive expertise in the planning, design, construction
management and operation of well fields, water treatment and distribution
systems similar to those
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proposed for the Project. Key personnel at PSOMAS were involved in the
design and project management for the RO desalination plant located in
Oceanside, California.
PSOMAS, as the Authority's District Engineer, has been involved from the
outset in the planning and investigation of beneficial use of the San Juan
Basin to reduce reliance on imported water supplies. The Project is a
result of those studies and PSOMAS' efforts to help obtain the necessary
water rights.
1.4 DESIGN-BUILD, AND OPERATE (DBO) TEAM
1.4.1 SOUTHWEST WATER COMPANY
Southwest Water Company (Southwest Water), the corporate parent of
ECO, is the project guarantor for all of the DB/Operator's
responsibilities under the Service Contract. Southwest Water was
incorporated in West Covina, California in 1954. Southwest Water's
experience to build, own, and operate is very extensive and includes
five water utility systems; two in California, one in New Mexico and
two combined water/wastewater systems in Texas. Southwest Water has,
through its subsidiaries ECO, New Mexico Utilities and Suburban
Water Systems, financed, built and operated over $100-million of
water/wastewater systems throughout the southwestern United States.
Examples of related experience are listed below:
. Suburban Water Systems has served over 30,000 customers in the
San Jose Hills District of the greater Los Angeles area for
several decades. The San Jose Hills District builds, owns and
operates tens of millions of dollars of infrastructure in
order to pump, store and distribute water to its clients.
. Suburban Water Systems has served over 35,000 customers in the
La Mirada District of Los Angeles County for several decades.
Like its sister system, San Jose Hills, La Mirada has funded,
built and operated a full service water system to bring the
highest quality water to its customers.
. New Mexico Utilities provides full service water production,
storage and distribution to approximately eight thousand
customers in the fast-growing region of Albuquerque, New
Mexico.
. Windermere Utilities, Texas is a water/wastewater system
jointly owned by Southwest Water and RTNT, Inc. and has been
operated by ECO since 1996. This is a combined water and
wastewater system, with secondary treatment of wastewater via
activated sludge and all phases of potable water supply.
Southwest Water's investment and ECO's operating capabilities
brought the system into full compliance within three months of
start.
. Hornsby Bend Utilities, Texas is a combined water and
wastewater system, with secondary treatment of wastewater via
activated sludge and all phases of potable water supply.
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1.4.2 ECO RESOURCES, INC.
ECO, established in 1973, is the initial prime contractor for the
team and will be responsible to the District for all other team
members until the Service Contract is assigned to the SPE. All team
members will function as sub-consultants/subcontractors to ECO until
the Service Contract is assigned to the SPE. ECO is headquartered in
the Houston suburb of Sugar Land, Texas and is led by president and
CEO, Peter J. Moerbeek. ECO manages, operates and maintains utility
systems offering water production, water distribution, sewage
treatment, wastewater collection, and storm water collection along
with many other services. ECO serves more than 200 cities, municipal
utility districts and large companies throughout the southern and
western United States. ECO has been providing a full range of
services to the water industry since its inception.
ECO's water/wastewater services, which serves a population in excess
of 650,000, includes:
. 214 water production plants operating at 282 MGD,
. 3,155 miles of water distribution with 200,000
connections,
. 2,146 miles of wastewater collection with 122,152
connections, and
. 332 lift stations.
Specific water, wastewater and RO projects include:
--------------------------------------------------------------------
YEAR LOCATION/AGENCY CAPACITY PURPOSE
--------------------------------------------------------------------
2002 Torrance, 4 MGD RO facility for Total
California/Water Dissolved Solids (TDS)
Reclamation District removal
--------------------------------------------------------------------
2001 El Paso, Texas 4 MGD, RO facility for TDS
expandable removal
to 8 MGD
--------------------------------------------------------------------
1995 Taft, California 1.5 MGD Two wastewater treatment
plants
--------------------------------------------------------------------
1995 Barstow, California 4 MGD Wastewater treatment
plant
--------------------------------------------------------------------
In addition to the above specific examples, ECO has provided water
and wastewater design, build and operate services to over 70
municipal utility districts similar to the District.
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1.4.3 BOYLE ENGINEERING
Boyle Engineering, the engineer for the Project, is an independent,
employee-owned company that was established over 60 years ago and
maintains offices in 20 cities with more than 500 employees. The
current president and CEO is Dan Boyd who has been associated with
the firm for 30 years. Boyle has grown to service a diversified
array of projects and infrastructure needs including water system
development. In addition to conventional water treatment
capabilities, Boyle is recognized nationally as a leader in the
field of innovative water treatment technology, including membrane
processes, ion exchange and specialized filtration. Membrane process
expertise includes experience in microfiltration (MF),
nanofiltration (NF), low-pressure RO, brackish water RO,
electro-dialysis reversal (EDR), and seawater RO applications.
Services provided include project conceptualization, pilot testing,
design and start-up. Relevant recent RO design projects, similar in
design to the Project, which Boyle Engineering has completed
include:
--------------------------------------------------------------------
YEAR LOCATION/AGENCY CAPACITY PURPOSE
--------------------------------------------------------------------
2002 Orange County, 4 MGD RO facility for color
California/Irvine removal
Ranch Water District
--------------------------------------------------------------------
2002 City of Albuquerque, 300 gallons Electro-dialysis for
New Mexico/ per minute TDS and arsenic
Metropolitan (gpm) reduction
Detention Center
Treatment Plant
--------------------------------------------------------------------
2002 Seymour, Texas 3 MGD RO facility for TDS,
hardness and nitrate
reduction
--------------------------------------------------------------------
2000 San Diego, 4 MGD RO facility for TDS
California/ expandable reduction
Sweetwater to 8 MGD
Authority
--------------------------------------------------------------------
1996 Las Animas, Texas 1 MGD RO facility for TDS,
expandable hardness and sulfate
to 1.5 MGD reduction
--------------------------------------------------------------------
1.4.4 OSMONICS
Osmonics, the preferred RO membrane provider for the facility, is
one of the pioneering companies in the application of membrane
technology to municipal drinking water treatment. Osmonics has a
long history of developing innovative
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water treatment technologies. Osmonics is a charter member of the
American Water Works Association and has extensive experience in
treating water from well fields, surface water, brackish water and
seawater. Osmonics is a public company, trading on the New York
Stock Exchange, which was founded in 1969 to expand membrane
technology in the industrial/municipal marketplace and currently has
total annual sales of $200 million. Osmonics has several production
facilities, including a facility located in northern San Diego
County. In the past five years, Osmonics installed RO/NF membranes
in 25 facilities for a total of 46.3 MGD in the United States. These
facilities ranged in size from 0.2 to 6.0 MGD. A representative list
of recent Osmonics RO and NF membrane and disinfectant water
treatment experience in municipal projects, similar to the Project,
includes:
--------------------------------------------------------------------
YEAR LOCATION/AGENCY CAPACITY PURPOSE
--------------------------------------------------------------------
2002 Ottawa, Illinois 4 MGD Radium reduction
--------------------------------------------------------------------
2001 Texas/Brazos River Authority, 6 MGD TDS reduction
--------------------------------------------------------------------
2001 Passcagola, Mississippi 2 MGD Color reduction
--------------------------------------------------------------------
2001 Chelsea, Michigan 1 MGD Hardness
reduction
--------------------------------------------------------------------
1999- Abilene, Texas/Coca-Cola 1.5 MGD TDS reduction
2001 Enterprises
--------------------------------------------------------------------
2000 Horizon City, Texas 4.25 MGD TDS reduction
--------------------------------------------------------------------
1997 Clifton, Colorado 2.4 MGD Sulfate and TDS
reduction
--------------------------------------------------------------------
1.4.5 ARB, INC.
ARB, Inc. (ARB), established in 1946, is a union contractor with
excellent long-term relationships with local Labor Unions and State
Building Trades. ARB is signatory to collective bargaining
agreements with all major trade unions throughout California and the
Western States. ARB's construction volume exceeded $340 million in
2001 and $163 million in 2000. ARB's bonding capacity is $350
million. ARB's work includes water/wastewater, civil/concrete,
underground and above ground piping, and power plant construction
throughout the State of California.
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Their experience includes performing site work, foundations, underground
and above ground piping, mechanical and RO equipment installation and
pre-engineered building installation for the Pre-treatment and Zero
Discharge facility at the La Paloma Power Plant in Bakersfield,
California. Major equipment installation for this facility included: multi
media filters, activated carbon filters, clarifiers, tankage, chemical
storage and injection systems, compressors, RO filtration, evaporators,
mixers, blowers and clean-in-place systems. Relevant water/wastewater
treatment plant and major piping projects ARB is constructing or has
completed within the past ten years include:
YEAR LOCATION/AGENCY CAPACITY PURPOSE
- ------------ ------------------------- -------------------------- -----------------------------------------
2002-2004 City of Ventura, CA 10 MGD Rehabilitation of existing wastewater
treatment plant
2001 City of Whittier, CA 10 MGD Water reservoir and pump station
2001 Laguna Niguel, CA/ 55,700 lineal feet of 6, Recycled water distribution system
Moulton Niguel Water 8, and 12-inch diameter
District pipeline
2000-2002 Bakersfield, CA/Pacific 6,700 gpm Raw Water RO Raw water treatment for use and discharge
Gas and Electric Co. treatment facility at the La Paloma Power Plant.
1995-1996 Wilmington, CA/Air 500 gpm RO treatment RO water treatment system for a Hydrogen
Products & Chemical Co. facility Reformer.
Analysis:
As discussed above, Southwest Water has been a major player in the water
treatment industry for almost 50 years. Through its wholly owned
subsidiaries, Southwest Water's experience in DBO encompasses three
utility systems and two combined water/wastewater systems serving over
70,000 customers in California, Texas and New Mexico. Southwest Water,
through its subsidiary ECO, has been involved in a Design, Build, Operate
and Finance (DBOF) desalter facility in El Paso, Texas, which was
financed, constructed and is presently being successfully operated. ECO
has also successfully completed the desalter facility in Torrance,
California, assisted in obtaining the operating permit and is presently
successfully operating the facility.
Boyle Engineering is recognized nationwide as being in the forefront of
new technologies involving both salt water and brackish groundwater
desalination. The design and process, which Boyle has prepared for the
Project, is proven and modified to meet the parameters of the Project.
Based upon previous RO facilities similar in process and size to the
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Project, which Boyle has designed, and the conservative assumptions Boyle
has used for the design of the Project, the design is sufficient to meet
the requirements for providing water, which meets federal, state and local
drinking water standards (Finished Water).
Since 1969, Osmonics has been a pioneer in the application of membrane
technology to the water treatment industry. As membrane replacement will
be a major operating cost, the proposed agreement that Osmonics is
negotiating with the DB/Operator will provide an approximately 4% savings
in the annual operating costs if membrane replacement life increases by
20%, and an approximately 5% increase in annual operating costs if the
membrane replacement life decreases by 50%. Osmonics has extensive
experience in designing membranes for similar-sized facilities and for
many different parameters of Raw Water.
ARB is a heavy construction contractor established in 1946 and has
extensive experience in the successful construction of water/wastewater
and piping facilities similar to and greater in size than the Project. ARB
has RO desalination experience relating to the La Paloma Pre-treatment and
Zero Discharge facility, in which they were responsible for the civil and
site work, mechanical equipment installation, piping, and tankage. ARB
will be the General Contractor for the Project and self perform all the
work except electrical, instrumentation, well drilling, pile driving and
field erected tanks. ARB has the financial and bonding capability and
sufficient water treatment construction experience to complete the Project
within the parameters of the Service Contract.
CONCLUSION:
PSOMAS is of the opinion that all of the Project Participants have the
relevant experience and financial capability to successfully complete the
design, construction and operation of the Project within the parameters of
the Service Contract.
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II PROCESS TECHNOLOGY
2.1 PROCESS
It is planned that the Project will extract brackish groundwater from
eight well sites and pump that groundwater to the RO Facility. In its
natural state the groundwater is unsuitable to use as drinking water due
to high concentrations of solids and other impurities. The RO Facility
will remove these solids and impurities, blend the permeate to be
compatible with the MWD water, and pump this Finished Water into the
existing District distribution system. The blended Finished Water will be
comparable to the District's MWD water and will meet all federal, state
and local drinking water standards.
The cornerstone of the Project's treatment technology is based on the RO
technology, developed over thirty years ago, a high-pressure process that
forces water through a thin membrane to filter out minerals and
contaminates, including salts, and other materials. The RO membrane is
similar to a microscopic strainer that essentially allows only water
molecules to pass through. In practice the feed water is pumped into a
closed vessel where it is pressurized against the membrane. As a portion
of the water passes through the membrane, the remaining feed water
increases in solid/salt content. At the same time a portion of this feed
water is discharged without passing through the membrane. Without this
controlled discharge, the pressurized feed water would continue to
increase in solid/salt concentration, creating problems such as
precipitation of super-saturated solids/salts and increased pressure
across the membranes. Based upon the design pressure, the Total Dissolved
Solids (TDS) of the Raw Water, and the membrane design, the amount of feed
water to be discharged to waste in the brine stream is approximately
twenty percent.
As indicated by the Process Flow Diagram (PFD) following this section, the
treatment process will consist of the following three processes:
. Pretreatment to remove sand, iron (Fe), and manganese (Mn) from the
well water flowing into the RO Facility;
. Desalting the pretreated water using the RO process to reduce the
TDS; and
. Post-treatment to meet drinking water quality regulations including
control of the product water corrosiveness.
2.1.1 PRE-TREATMENT
The pretreatment process will consist of three steps:
DE-SANDING
At the RO Facility, the water will be de-sanded using an inline
screening device with screens specifically designed to remove
particles less than 100 microns in size. Two de-sanding units will
be installed to provide redundancy and increase reliability. The
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sand removed from the water accumulates in the de-sander and is
periodically removed and transported to a landfill.
Fe/Mn REMOVAL
After the sand is removed, the water proceeds to the iron and
manganese filters where the dissolved iron and manganese in the
groundwater is removed by the greensand filtration/precipitation
process, which has been utilized for decades for iron and manganese
removal. Upon contact with an oxidizing agent (potassium
permanganate and sodium hypochlorite) the electrical charge of the
Fe/Mn increases and results in the formation of iron and manganese
solids, which are filtered from the water. The filters are
backwashed periodically, (once per day per filter) and the backwash
water with the diluted Fe/Mn solids is pumped to the spent backwash
recovery tank and then the suspended Fe/Mn solids are pumped to the
adjacent, existing sewer collection system.
CHEMICAL ADDITION
After removal of Fe/Mn the filtrate is injected with sodium
bisulfate, sulfuric acid, if required, and scale inhibitor. This
process eliminates the potential for calcium carbonate, barium
sulfate and silicate scale formation on the RO membranes.
2.1.2 DESALTING (RO)
Following the injection of the acid (if used), scale inhibitor and
sodium bisulfate, the RO feed water will flow into the RO membranes.
The saline feed water is forced through the semi-permeable membranes
in a closed vessel at high pressure (between 225 to 375 pounds per
square inch (psi)) and the salts are deposited on the front of the
membrane. To prevent salt concentration build up, a portion of the
feed water is discharged to the waste stream (concentrate) without
passing through the membrane. This waste stream, brine concentrate,
is discharged directly to the outfall. In order to meet the required
drinking water standards for TDS, two stages in series are utilized
in the RO process. (The first stage permeate water becomes the feed
water for the second stage.) After treatment by the second stage,
the permeate is then pumped to the post-treatment process.
2.1.3 POST-TREATMENT
Post-treatment will consist of degasification, blending the RO
permeate with pretreated well water and chemical addition. The RO
permeate flows into the top of the degasifier and flows downward
through plastic packing material designed to break the water stream
into a multitude of smaller streams. Air is injected into the bottom
of the tower and flows upward through the streams of water removing
carbon dioxide. The degasified water then flows into a sump at the
bottom of the degasifier where it is blended with the pretreated
well water. Chemicals are then added to make the permeate compatible
with the water within the District's system and the Finished Water
is pumped into the distribution system as it is produced.
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Analysis:
The RO technology utilized for the design of the project has been
commercially available since the 1970's and has been utilized in the
treatment of brackish ground water in over twenty-five (25) facilities of
similar size within the United States. The RO technology proposed for this
Project is commercially demonstrated and is similar in design to other
brackish water desalination plants
CONCLUSION:
PSOMAS is of the opinion that the brackish water treatment process
proposed will produce the quality and quantity of water required by the
Service Contract.
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[GRAPHIC APPEARS HERE]
Figure 2.1 Process Legend and Block Flow Diagram
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III. PROJECT SITE
3.1 SITE DESCRIPTION
The site for the RO Facility is approximately a 1.2-acre "L-shaped" parcel
located adjacent to 32400 Paseo Adelanto in San Juan Capistrano,
California. This property is owned by the City of San Juan Capistrano. A
pre-school, through a licensing agreement with the City, a parking lot,
and the District's storage area, presently utilize the site. Relocation of
the pre-school has been negotiated and agreed upon by all parties. The
site is adjacent to Descanso Veterans Park. A site plan is attached
following this section.
A review of the Geo-technical report prepared by Geomatrix Consultants,
Inc., dated January 2002, indicates that the closest active earthquake
fault is the Newport/Inglewood fault, 8 kilometers from the Project.
Additional faults in the vicinity are the Palo Verde fault at 33
kilometers, Whittier fault at 42 kilometers, Elsinore fault at 32
kilometers, and Chino fault at 35 kilometers. The report states that, "The
possibility of a fault rupture at the site is considered remote." The
Geo-technical report indicates that due to the gradation of the soil (clay
silts, sandy silts, and poorly graded sands), the RO Facility site is
susceptible to liquefaction. Liquefaction occurs in sandy/granular soils
with a high groundwater table and poor gradation and during an earthquake
results in the displacement of the liquid in the voids between the
granular members and allows the material to settle. This situation is very
common along the coast of California.
The possibility of liquefaction occurring during a seismic event has been
considered and mitigated by the foundation design. This design, which
consists of either drilled piles thirty and thirty-six inches in diameter
and up to fifty feet below ground level or driven piles, at the District's
option, has proven to be effective against the impacts of liquefaction
through its use for many years.
The Service Contract states that the District shall undertake and complete
any environmental remediation of the sites, which may be required during
the Development Period. The Phase 1 Environmental Report and the mitigated
negative declarations with respect to the sites, prepared by the District,
identified no hazardous material. The discovery of Hazardous Materials on
the site after the Construction Date shall be treated as an Uncontrollable
Circumstance (UCC) governed by the terms of the Service Contract. See the
discussion in the Service Contract for remedies pertaining to a UCC.
3.2 OFFSITE FACILITIES
The offsite facilities will consist of the following:
. Eight, or possibly nine, well sites, all located in the San Juan
Basin. The number will be determined based upon obtaining flow
information after the initial eight wells are developed. If a ninth
or additional wells are required, the cost of developing, operating
and maintaining the additional wells will be the responsibility of
the District. Some of the proposed new wells are to be constructed
on existing wells sites and all existing wells will be abandoned in
accordance with applicable standards.
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. A pipeline, varying in diameter from eight to sixteen inches, to
collect the Raw Water from the well sites and convey it to the RO
Facility.
. A pump station and a sixteen-inch pipeline to convey the Finished
Water from the RO Facility to the connection with the District's
system in the 350-distribution pressure zone. The RO Facility will
also furnish Finished Water via a separate connection to the
250-pressure zone. The Finished Water will be pumped to the
distribution system as it is produced.
. An eight-inch pipeline to convey the RO concentrate discharge from
the RO Facility to the Chiquita Land Outfall. The DB/Operator will
pay a one-time fee of $599,640 to the Santa Margarita Water District
(SMWD) for the purchase of capacity rights, on behalf of the
District, to discharge up to 1.2 MGD of brine concentrate into the
SMWD Chiquita Land Outfall, process the brine concentrate through
the SERRA Wastewater Treatment Plant, then discharge the concentrate
through the SERRA Ocean Outfall. In the event that the outfall
becomes unavailable or restricted in use for brine disposal, for any
reason other than the fault of the DB/Operator, it becomes an UCC
and the District will pay the cost of an alternate disposal method
and the DB/Operator shall be relieved of any Performance Guarantees.
If the DB/Operator is operating the RO Facility in compliance with
the Production Efficiency Guarantee, the District will pay any
additional charges imposed by SMWD as a result of the discharge of
excessively concentrated or voluminous brine to the Chiquita Land
Outfall, which is attributable to the treatment of Raw Water having
parameters outside the Design Raw Water Quality Parameters specified
in the Service Contract. The RO feed pumps will provide the pressure
necessary to convey the concentrate from the RO Facility to the
outfall.
. The Strawberry Hill Booster Pumping Station will include two
40-horsepower, turbine pumps located in either an underground vault
or an aboveground pump house. The Booster Pumping Station will lift
the treated water from the 350 Hydraulic Grade Line (HGL) pressure
zone to the 425 HGL pressure zone. This Booster Pumping Station will
have a programmable logic control and a radio transmitter unit for
communication with the District's existing Supervisory Control and
Data Acquisition (SCADA) system. The responsibility for operating
and maintaining this pump station will, upon completion, be
transferred to the District.
3.3 SITE CONDITIONS
In order to construct the Project, the following site conditions will be
addressed by the DB/Operator:
3.3.1 RO FACILITY
. Demolition of the pre-school.
. Encroachment onto the existing parking lot for Descanso
Veteran's Park: A minimum amount of parking will be at the
RO Facility. The majority of the
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parking facility for the park will relocate to the City Hall
parking lot, approximately 100 yards to the north. This
relocation requires that the DB/Operator provide a direct,
protected access to the park from the parking lot. This cost
has been included in the design and cost of the Project.
. An existing 18-inch sewer line is located approximately 6 to
8 feet north of the proposed south property line for the RO
Facility. This line will remain and accept the sanitary flow
and iron and manganese sludge from the RO Facility.
. Siting of elements within the RO Facility will have to take
into account the location of the sewer line.
. Utilization of land already owned by the City.
. The project must comply with the City's noise ordinance,
which states that, "The noise level must be reduced to 45 db
inside the nearest home, four feet from the wall with the
windows closed."
3.3.2 WELL SITES, PUMP STATION AND PIPELINES
. Property utilized for the well sites is under public
ownership or dedicated right-of-way.
. Wells must be a minimum of 800-feet apart.
. A fifty-foot separation must be maintained from wells to
sewer lines.
. The California Department of Health Services (CADHS) will
allow the well sites to be situated adjacent to San Juan
Creek, but requires that groundwater from the wells can not
be influenced by surface water flowing in the creek. CADHS
recently stated that it is currently enforcing new
standards, in whereby the wells have to be a minimum
distance of two hundred feet from the Creek to be considered
to have no surface water influence. In addition, California
has passed a statewide law, effective January 1, 2003. This
law states that the owner or operator of a well must have
control of any percolation at that well site for a radius of
50 feet from the wellhead. If the above parameters are not
met, CADHS can require that all the Raw Water processed
through the RO Facility be treated to full surface water
standards, which would cause both a capital cost and
operating cost impact to the Project. Although these
requirements are UCC's to the DB/Operator, negotiations are
underway with CADHS to allow the well sites to remain as
they are now situated and formulate and employ an enhanced
monitoring plan to verify that there is no surface water
influence on the Raw Water that is being treated. If, the
enhanced monitoring plan is not acceptable to CADHS, the
Project will require a larger chlorine contact tank to allow
for increased disinfectant of the treated water. Preliminary
estimates of this higher degree of disinfectant are
increased capital cost of approximately $250,000 and
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increased operations cost of approximately $30,000 per year.
These increases equate to approximately one percent (1%) of
the Capital Improvement Budget and approximately three
percent (3%) annually to the Operations and Maintenance
Budget
. The preferred location of the Strawberry Hill Booster
Pumping Station described in Appendix 1 to the Service
Contract is within a proposed subdivision development on
land not currently owned by the City. The City is
negotiating with the developer to acquire a location for the
pump station. If the City is not successful on obtaining a
pump site within the development a preferred alternative
site in a location adjacent to the development but within
existing City right-of-way has been identified. However,
this decision is not on the critical path for the start-up
of the Project and alternatives are available if and when
timing does become critical.
. Although the majority of the pipeline alignments are located
within existing right-of-way, there are a total of five
segments, which will require easements from private parties
and four segments which require encroachment permits from
Caltrans, Southern California Regional Rail Authority
(SCRRA), or the County of Orange. Obtaining these easements
and encroachment permits is the responsibility of the
DB/Operator. The easements, from a total of three or
possibly four property owners, and the encroachment permits
are identified and under the process of negotiation and
procurement. Obtaining the remainder of the required
easements and encroachment permits are normal construction
related activities.
. Nationwide permit required from Corps of Engineers for creek
crossings. It is assumed that the California Department of
Fish and Game will not be involved, as the creek crossings
will be bored.
. Corrosive soil dictates that PVC pipe and lined and coated
cast iron fittings be utilized.
CONCLUSION:
PSOMAS is of the opinion that the site on which the RO Facility is
to be located is adequate in size and location and from an
infrastructure and geotechnical perspective is adequate for
construction and operation of the RO Facility. The sites for the
wells do not meet the new requirements that CADHS is enforcing, but
these new requirements should not significantly increase the capital
and operating costs of the Project.
3.3.3 GROUNDWATER BASINS
The San Juan Creek watershed covers more than 111,000 acres draining
the western slope of the Santa Ana Mountains through San Juan,
Horno, Trabuco and Oso Creeks (DWR, 1972). Surface flow occurs
primarily in the winter and spring and recharges the alluvial
sediments that comprise the groundwater basin.
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Unconsolidated alluvial deposits of silt, sand and gravel along San
Juan and Trabuco Creeks form the local groundwater basin. Surface
flows will percolate into the granular sediment and recharge
groundwater. Finer grained sediment at the bottom of Oso and Horno
Creeks provides less opportunity for deep percolation until the flow
reaches the Trabuco or San Juan Creek channels, respectively. Horno
Creek drains an urban area dominated by residential development, a
golf course and Capistrano Formation siltstone. Urban runoff from
this area follows the original natural channel to approximately
Interstate 5, where engineered channels follow the original path to
San Juan Creek.
The Trabuco Creek sub-basin represents a small part of the much
larger San Juan Creek Basin. The alluvial aquifer system in the
Trabuco Creek sub-basin is narrower and thinner than the aquifer
along San Juan Creek, and represents only about 14 percent of the
total Basin storage capacity.
The District has primarily been using the Trabuco sub-basin for the
production of potable water. As explained above due to the
geotechnical condition of this Basin, the water production has
averaged 1400 AFY for the past ten years. Last year, which was one
of the driest years on record, this production was reduced to about
900 AF.
The San Juan Basin is substantially larger and has a different
configuration than the Trabuco sub-basin, therefore providing a
higher proportional yield. The November 1998 Stetson/Boyle Report
entitled "Availability of Unappropriated Water - San Juan Creek
Basin" indicates that 11,100 AFY could be reliably extracted by the
Project in addition to existing (historic) pumping with this amount
increasing to over 14,000 AFY at build-out of the tributary area.
All of the well sites for the Project are located within the San
Juan Basin.
CONCLUSION:
PSOMAS is of the opinion that there is sufficient unappropriated
water within the San Juan Basin to provide an adequate source of Raw
Water for the Project for the Operation Period of the Service
Contract and beyond for the full term of the Bonds.
3.3.4 CALIFORNIA ENVIRONMENTAL QUALITY ACT (CEQA) MITIGATION
The Authority passed and adopted Resolution 95-8-1 approving a
Mitigated Negative Declaration for the Project. This Mitigated
Negative Declaration was determined after a supporting Expanded
Initial Study was prepared, publicly reviewed, all comments
addressed and responded to and the Expanded Initial Study was
revised to include all pertinent comments.
The Final Mitigated Negative Declaration specified certain
mitigation measures, which have to be implemented by the DB/Operator
and the Authority in order to comply with the Mitigated Negative
Declaration. These mitigation measures are detailed in Resolution
95-8-1 and the Service Contract.
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Analysis:
An analysis of the sites required for the Project indicates that there are
no apparent environmental or site construction concerns that would prevent
the successful completion of the Project. In addition, provisions within
the Service Contract allocate costs arising from undetermined site
constraints. Furthermore, the required pipeline easements or encroachment
permits have been identified and are being negotiated. It is anticipated
that these easements will be obtained in due course during the
construction period so that there should be no delay to the construction.
If timing does become critical, rerouting of the pipeline would be an
option.
All geo-technical and subsurface restraints known at this time have been
considered during the design and have been mitigated through the
foundation design for the RO Facility. The foundation design is, of
necessity, a conservative design and there are sufficient safety factors
incorporated in the design to compensate for unknown subsurface
circumstances.
A review of the conditions indicated in the Mitigated Negative Declaration
determined that it does not impose any conditions that are not common to
normal construction activities and the Mitigated Negative Declaration
conditions should not cause any delay or cost increase to the Project.
CONCLUSION:
PSOMAS is of the opinion that the environmental site assessments have been
accomplished in a manner consistent with industry standards, using
appropriate industry protocols. The adopted Mitigated Negative Declaration
for the Project does not impose any conditions that are not common to
normal construction activities and should not cause any significant delay
or increased cost to the Project.
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[GRAPHIC APPEARS HERE]
Figure 3.1 WTP Site Layout
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[GRAPHIC APPEARS HERE]
Figure 3.2 Well Collection System Schematic Alignment
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[GRAPHIC APPEARS HERE]
Figure 3.2 (continued) Well Collection System Schematic Alignment
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[GRAPHIC APPEARS HERE]
Figure 3.3 Treated Water and RO Disposal Pipelines
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IV. ENGINEERING, PROCUREMENT AND CONSTRUCTION
4.1 CONCEPTUAL DESIGN PARAMETERS
The design of the Project is based upon the Raw Water quality defined in
the Service Contract. The Raw Water quality design data indicates
insignificant concentrations of organic compounds. The design TDS for the
Raw Water is significant at 1705 mg/L. Specifically, the design values for
iron, manganese and barium are significant but the greensand
filtration/precipitation process has proven very effective in removing
these constituents, which otherwise could cause scaling and fouling of the
membranes, as has been successfully accomplished in other facilities.
Extensive studies of available data and negotiations have occurred between
the District, Boyle Engineering and the DB/Operator to arrive at the
values for these parameters. The values have been obtained from existing
wells in the vicinity of the proposed new wells. The worst-case scenario
of values was determined and the design of the RO Facility is sufficiently
conservative to provide Finished Water within the parameters of the
Service Contract. The Water Treatment Guarantee shall apply only if the
actual Raw Water supply is within the parameters of the Service Contract.
The DB/Operator operation requirements are based upon Raw Water quality
not to exceed the base values indicated in the Service Contract. If the
actual Raw Water quality exceeds these parameters, the DB/Operator shall
provide to the District, within thirty days, an assessment as to the
potential impact of such non-conformity on the Design/Build Price, the
Service Fee, Acceptance and Performance Guarantees, together with a
discussion of possible UCC mitigating measures.
To confirm the effectiveness of the RO Facility process for removal of
TDS, iron and manganese and to determine that the Finished Water will
attain the standards for water produced by the MWD Diemer Filtration Plant
(alternative source) for flavor, color and aroma, a small-scale pilot
plant (2 gpm) has been constructed and operated at the site of an existing
well. The entire treatment train proposed for construction at the RO
Facility has been tested, including a functioning model of the Chemical
Feeds; Greensand Filter; Reverse Osmosis; and Air Stripping. The pilot
plant was operated for a minimum of five days, eight to ten hours per day.
During operation of the pilot plant, samples were taken of the following:
1) Raw Water, 2) Filtrate from the Fe/Mn filter, 3) RO Permeate, 4) RO
Concentrate and 5) Finished Water. These samples were then tested in
accordance with the Service Contract. The results of the Pilot Test
indicated that the Raw Water quality was within the specifications of the
Service Contract and that the Finished Water should attain the standards
for water produced by the MWD Diemer Filtration Plant.
Since the TDS goal, per the Service Contract, for the treated water
delivered to the system is less than 500 mg/L, it will not be necessary to
desalt all of the water. It is expected that the product water will
consist of an approximate blend of 75% RO permeate and 25% pretreated well
water. The blended Finished Water will meet all requirements for federal,
state, and local drinking water standards.
The RO concentrate water (residual brine water) will be discharged at the
maximum rate of 1.2 MGD through the SERRA Ocean Outfall into the Pacific
Ocean. The brine concentrate water quality is indicated as within the
parameters of SERRA's current
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National Pollution Discharge Elimination System (NPDES) discharge permit
and amending the permit will not be required.
4.2 ENGINEERING DESIGN
The treatment process will include the following steps:
. Pre-treatment, which includes sand removal, iron and manganese
removal utilizing the greensand process, and chemical addition.
. Desalting of approximately 75% of the pretreated water using RO,
with 25% of the pretreated water used for blending.
. Degasification of the RO permeate water.
. Blending of 25% of the pretreated, but not desalted water, with the
permeate water.
. Post-treatment of the blended water to meet drinking water quality
regulations and to control the Finished Water corrosiveness.
Due to the District's NPDES permit requiring that all test/development
water discharged from the wells be treated, all such well water will be
conveyed through the collection pipeline to the RO Facility. At the RO
Facility, the water will be de-sanded using two in-line-screening devices
designed to remove particles less than 100 microns in size. The
accumulated sand removed from the water is hauled to a landfill. The two
screening devices increase reliability and provide redundancy.
The greensand treatment process, which has been in use for decades, will
be used for removal of the iron and manganese. In order to meet the iron
and manganese limits in the product water of 0.1 mg/L and 0.025 mg/L
respectively, the process will use potassium permanganate and sodium
hypochlorite to process all the well water with the resulting formation of
iron and manganese solids, which can then be filtered from the water. The
greensand process will result in approximately 145,000 gallons per day
(gpd) of spent backwash water. This backwash water will be pumped to a
recovery tank where the inert solids will drop out and the sludge will
then be disposed of in the existing sewer line. The clarified water from
the recovery tank will be recycled to the greensand filters for
re-treatment, which reduces the amount of well water required.
Recognizing that there can be significant iron and manganese
concentrations in the well water, and that the quality can vary during the
pumping cycle, the filter size has been based on a conservative design.
Sodium bisulfate and scale inhibitor will be added to the RO feed water
from the greensand filters to neutralize the oxidizing agents used in the
greensand process and prevent damage to the RO membranes.
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Following the injection of scale inhibitor and sodium bicarbonate, the
feed water will flow into the RO membranes. Two streams will emanate from
the RO process: 1) permeate (desalted water), and 2) brine concentrate.
The RO process parameters include:
. Two RO package units, which bolt directly to the foundation. Each
package unit has two stages in series and the RO package units are
in parallel. Permeate from the first stage RO package unit becomes
the feed water for the second stage RO package unit. Each RO package
unit has a permeate capacity of approximately 2.57 MGD. The first
stage of each package unit has an average capacity of 13-gpd/square
foot (sf) of membrane area and the second stage has an average
capacity of 12-gpd/sf of membrane area.
. Approximately eighty percent of the pretreated water processed
through the RO package units goes to the District's distribution
system and twenty percent is discharged to the outfall as brine
concentrate water.
. 150-psi feed water pump discharge pressure.
. Concentrate discharged directly into the outfall.
It is also proposed to install energy recovery devices on the concentrate
from the second RO stage in order to use the energy in the water to assist
the electric motors driving the RO feed water pumps.
Post-treatment will consist of degasification, blending of the RO permeate
with the bypass well water and chemical addition. Permeate enters the top
of the degasifier and flows downward. Air is injected from the bottom and
flows upward stripping the carbon dioxide and reducing the pH of the
water. The degasified permeate then flows into a 30,000-gallon sump where
the bypass water is blended and caustic soda is added to adjust the ph so
that the resulting Finished Water is non-corrosive.
The Finished Water is then pumped directly from the sump into the
District's distribution system. The Finished Water is primarily designed
to supply the needs of the 250 and 350 HGL pressure zones. These zones
have a storage capacity of 1.6 MG with an additional 3 MG planned for the
250 zone. Utilizing the existing and planned storage capability
accommodates the District's peaking requirements and allows the plant to
operate at a constant rate.
4.3 MAJOR EQUIPMENT - WELL SITES
There will be a total of eight well sites developed for supply of Raw
Water to the RO Facility. These sites will range in depth from 130 feet to
160 feet. Each well site will have a production capacity of 500 to 1,000
gpm.
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Each well site will have a vertical turbine pump, a 50 to 60 horsepower
fixed speed motor, and associated piping. The equipment will be contained
in an enclosed thirteen feet by twenty-four feet masonry building.
4.4 MAJOR EQUIPMENT - PRE-TREATMENT
The major equipment in the pretreatment process includes the iron and
manganese filters. These filters consist of three dual cell filters with
the following characteristics:
. Twelve feet diameter by forty-seven feet long.
. 375 square feet (sf) of filter area per filter, 187.5 sf per cell.
. 1,500 gpm/sf of filter area.
. 4 to 6-gpm/sf initial backwash rate.
. 10-gpm/sf final backwash rate.
Also included in the major equipment for the pre-treatment process are:
. 30 feet diameter by 16 feet tall, 85,000-gallon bolted steel
backwash water supply tank with three 25 horsepower fixed-speed
pumps.
. 40 feet diameter by 24 feet tall, 225,000-gallon bolted steel spent
backwash water recovery tank with three 5 horsepower fixed-speed
pumps.
. Two cartridge filters.
. Chemical Feed systems.
a. 4,000-gallon sodium bisulfate storage tank, three feed
pumps.
b. 1,000-gallon scale inhibitor storage tank, two feed pumps.
c. 4,000-gallon sodium hypochlorite storage tank, four feed
pumps.
d. 4,000-gallon caustic soda storage tank, two feed pumps.
e. 2,000-gallon ammonia storage tank, two feed pumps.
f. Potassium permanganate mixing tank with mixer, two feed
pumps.
4.5 MAJOR EQUIPMENT - REVERSE OSMOSIS
The major equipment for the RO desalination process consists of the
following:
. Two trains of RO package units consisting of two RO stages in
series, 68 pressure vessels each with 7 membranes per vessel.
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. Two 200 horsepower VFD equipped feed water pumps. One pump for each
of the RO trains.
. One RO membrane clean-in-place system for both trains.
4.6 MAJOR EQUIPMENT - POST-TREATMENT
The major equipment for the post-treatment process includes the following:
. Two degasifiers with clear well. Each degasifier has the following
parameters:
a. RO permeate flow is 2800 gpm.
b. Packing depth is 7 feet.
c. Volume of packing is 830 cubic feet.
d. Air to water ratio is 25:1.
. Two 10 horsepower fixed-speed blowers.
. Two 125 horsepower VFD equipped product water pumps, one 125
horsepower fixed speed product water pump, two 60 horsepower VFD
equipped product water pumps and one 60 horsepower fixed speed
product water pump.
Analysis:
The design is conservative and proven in numerous similar brackish water
RO facilities constructed and operating within the United States. The
design is predicated on the worst-case scenario of the indicated
parameters. Boyle Engineering has indicated that in addition to assuming
the worst-case scenario, there is a 25% redundancy factor included in the
design.
CONCLUSION:
PSOMAS is of the opinion that, based upon the Service Contract parameters,
the preliminary design, and the proposed equipment list the Project will
operate and provide Finished Water within the Service Contract parameters
for the Operation Period of the Service Contract and beyond for the full
term of the Bonds.
4.7 CONTRACTOR'S SCOPE OF WORK
The contractor, ARB, will be responsible for constructing the RO Facility,
drilling and construction of new well sites, construction of the well
water conveyance pipeline, construction of the RO concentrate pipeline,
construction of the product water pipeline, construction of the booster
pump station, and associated controls and power systems. The RO Facility
construction consists of removal of existing facilities, rerouting of
existing utilities, grading, access road, parking lot, an RO building with
two RO package units, a
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chemical building, a backwash supply tank, a backwash recovery tank, three
iron/manganese filters, two sand filters, two cartridge filters, backwash
pumps, process feed pumps, product water pumps, two degasifiers,
30,000-gallon clearwell, fencing, associated piping and control systems.
Originally, the building foundations were designed to be mat foundations.
Additional soil information has determined that the foundations will be
either drilled or driven piles with grade beams.
There are a total of eight well sites, which are required in order to
provide sufficient feed water (Raw Water) to the RO Facility. Each well
site requires drilling of a new well. Each well site will consist of well
casing, vertical turbine pump, electrical gear, controls, remote
monitoring, associated piping, and a thirteen-foot by twenty-four-foot
pump house. There are six existing wells which are no longer in use or are
substandard and will require abandonment in accordance with State of
California standards.
Six of the well sites are located on the west side of the Interstate 5
Freeway and south of the RO Facility. The seventh well site is located
adjacent to the RO Facility. The eighth well site is north of the RO
Facility and east of the Interstate 5 Freeway. If a ninth or further
additional wells are required, the District will bear all of the capital,
operation, maintenance, repair and replacement costs of such ninth and
additional wells and related pipelines required for connection of the
additional wells to the existing well field.
The feed water pipeline from the south well sites to the RO Facility will
be a sixteen-inch line from the RO Facility to the west side of Trabuco
Creek and connects to an existing conveyance line. The feed water pipeline
from the eighth well site will be an eight-inch line jacked under
Interstate 5 Freeway then proceeding to the RO Facility.
The RO brine concentrate disposal pipeline is an eight-inch line from the
RO Facility to the connection with the Chiquita Land Outfall southeast of
the RO Facility.
The Finished Water line is a sixteen-inch line proceeding north from the
RO Facility, to the connection with the District's 350 HGL pressure zone.
Another Finished Water line proceeds to the north and connects with the
250 HGL pressure zone.
Analysis:
Based upon a review of the preliminary design, ARB's scope of work
included in their Guaranteed Maximum Cost contract price is in accordance
with the preliminary design requirements and the Scheduled Acceptance Date
should be obtainable. ARB has extensive experience in the construction of
water and wastewater treatment plants and pipelines as well as being the
contractor for the La Paloma Pre-treatment and Zero Discharge RO Facility.
CONCLUSION:
The construction of the Project is similar to other projects constructed
by ARB and PSOMAS is of the opinion that the construction of the Project
can be accomplished within the scope of the Service Contract, by the
Scheduled Acceptance Date and within the Fixed Design/Build Price included
in the Service Contract.
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4.8 ACCEPTANCE TEST/PROVISIONAL ACCEPTANCE
During the six-day Acceptance Test, specified in the Service Contract,
each train of the RO and iron/manganese filter systems will be operated
sequentially, each at 2.57 MGD. Operation of each half at 2.57 MGD shall
constitute acceptable demonstration of the Projects capability to produce
5.14 MGD of Finished Water. The Acceptance test shall be conducted for a
minimum of six days with a minimum of two days continuous operation of
each of the two RO trains.
During the Acceptance Test, the project improvements must also
successfully demonstrate the following:
1. Manual shutdown and start-up of the project improvements as a
functioning train.
2. Automatic shutdown of the project improvements as a functioning
train.
3. Operation of each train (RO package unit and Fe/Mn filter) to
produce the quantity and quality of Finished Water as stated above.
During the Acceptance Test, the Finished Water will be regularly monitored
and sampled according to the Service Contract for compliance with the
Water Treatment Guarantee. An outside laboratory certified for water
analyses by the State will analyze the samples. During the Acceptance
Test, the Project will discharge brine into the Chiquita Land Outfall, the
Finished Water will be discharged into the San Juan Creek, and the iron
and manganese waste will be discharged into the sewer system.
One hundred and eighty (180) days prior to performing the Acceptance Test,
the DB/Operator shall prepare and submit to the District and PSOMAS as the
Independent Engineer, for review and approval, a detailed Acceptance Test
plan. This plan shall conform to all the requirements of the Service
Contract. The District and PSOMAS shall have thirty days to approve the
plan, but the Acceptance Test cannot take place until the DB/Operator has
addressed all comments by the District or Independent Engineer.
Following the completion of the Acceptance Tests, the DB/Operator shall
have the right to certify Acceptance on a provisional basis. In order to
certify Acceptance on a provisional basis, the DB/Operator will deliver
written certification to the District and PSOMAS, that in the good faith
judgment of the DB/Operator and based upon all information available at
the time of the certification, all of the Acceptance Date Conditions have
occurred. The date upon which the DB/Operator's provisional Acceptance
certification is delivered is referred to as the "Provisional Acceptance
Date" and thereupon "Provisional Acceptance" shall be deemed to have
occurred.
Upon the occurrence of Provisional Acceptance, the Operation Period will
commence and all Operation Period rights and obligations of the parties
shall apply. The initial term of the Service Contract will commence on the
Provisional Acceptance Date, and thereafter the parties shall be bound as
if Acceptance had permanently occurred, except as provided in the Service
Contract in the event the District disputes the DB/Operator's Provisional
Acceptance certification.
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CONCLUSION:
PSOMAS is of the opinion that the Acceptance Test is sufficient to predict
that the Project will perform reliably for the Operation Period of the
Service Contract and beyond for the full term of the Bonds. This opinion
is based upon the assumption that the required preventative and scheduled
maintenance is performed in accordance with industry standards.
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V. OPERATION AND MAINTENANCE
5.1 PROPOSED OPERATION OF THE FACILITY
Pursuant to the A & A Agreement, ECO brings a variety of techniques and
procedures to enhance water treatment efficiencies in process control and
management. Their approach is to separate the individual processes and
analyze each process to ensure that all areas are maintained at the level
of operations required.
The individual processes as determined for the Service Contract Project
Improvements are as follows:
. Production wells.
. Sand removal.
. Iron and Manganese removal via "greensand" filters.
. RO treatment.
. Brine Discharge.
. Adjustment of the RO product water by degasification, chemical
addition and disinfection.
. Sampling/analyses/reporting.
. Discharge of Finished Water into the District system.
In that an RO system requires a fairly sophisticated level of technology,
process control becomes the utmost importance. Since it is essential that
accurate data be collected on an ongoing basis, several systems have been
included in the instrumentation and control network to provide "on-line"
information to the operator. The collection of on-time data is essential
in aiding the operators to vary the process to compensate for fluctuations
in the water quality and to maximize the efficiency of the Project.
In order to provide ongoing monitoring and control of the process, the
wells, RO Facility and the Booster Pumping Station will be provided with
instrumentation and remote control equipment.
A Supervisory Control and Data Acquisition (SCADA) System will be provided
at the RO Facility control room. The SCADA System will be interfaced with
all process control and instrumentation equipment at the wells and the RO
Facility. The SCADA System will incorporate redundancy to meet all
requirements of the California Department of Health Services. The Booster
Pumping Station will be incorporated with the existing District SCADA
System. The RO Facility SCADA System will interface with the District's
existing SCADA System using compatible licensed radio. The SCADA System
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will be implemented with report generation coordinated with the District
requirements. In addition, an Un-interruptible Power Supply (UPS) will be
provided for the SCADA System in the event there is a power outage.
The control system will provide reliable control and information transfer
within the RO Facility along with remote locations including the
District's headquarters and the well sites. This system will provide
complete automation of the filtration and auxiliary facilities. The
control system will monitor RO Facility operations and automatic shutdown
will be initiated when certain conditions exist.
The DB/Operator will assign a Manager of the Project and Operation
Services who is trained, experienced, and proficient in the management and
operations of similar projects as the Facilities Manager for this Project.
The Facilities Manager will be assisted by a full-time Project Operator
who will have an Operator's Certificate as required by CADHS. Both the
Operator and the Facility Manager will have the responsibility,
twenty-four hours a day, seven days a week, to respond to all call-outs
within two hours or less. Telemetry and automatic alarm paging are the
traditional methods of off-hours coverage. This will be enhanced with the
Osmonics RO system capability to be remotely monitored and evaluated via a
laptop computer over a phone line.
5.2 MAINTENANCE MANAGEMENT
The DB/Operator's commitment to the District is to properly maintain the
Project and at the end of the Service Contract term provide the District
with a system in good working order and a useful life in excess of the
standards as defined in the Service Contract between the DB/Operator and
the District.
The goal of ECO's preventative and corrective computerized maintenance
management plan is to prevent and correct equipment deficiencies while
minimizing breakdowns and extending service life. The plan incorporates
all Project components, along with inspection and maintenance frequencies,
inspection and maintenance techniques, and the method of record keeping
for each piece of equipment. Periodic scheduled, specific maintenance
procedures are performed on all plant equipment and tracked via a
computerized system that minimizes human error.
The computerized Preventive Maintenance Tracking Program tracks both
scheduled and unscheduled preventative and corrective maintenance and
repair. The program also tracks maintenance, labor, and spare parts
inventory, prints work orders and tracks work order history. All completed
maintenance for each piece of equipment is normally kept on a computer
disc and backed-up with a hard copy placed in the maintenance file created
for each piece of equipment. This file contains information on all
preventative maintenance completed including the date work was
accomplished, supplies and parts utilized, and the technician who
performed the work. Maintenance reporting is performed through daily and
weekly inspection reports and work orders. A weekly summary Preventative
Maintenance Report outlines all inspection reports and preventative
maintenance performed, lists scheduled work not completed, and lists
corrective maintenance
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scheduled for the following week. The following schedule is normally
adhered to for correcting deficiencies:
. Emergency repairs are completed within eight hours,
. Urgent repairs are completed within three days, and
. Routine service completed within thirty days.
Longevity of the Project is of primary concern and importance and the
critical areas are the RO membranes and wells. The other systems tend to
fall within two categories. The first is large equipment for which
operating and maintenance standards have been well established over a long
period of use. The second category is smaller and more specialized pieces
of equipment, which are typically covered by specialized contract
maintenance firms.
The life span of RO membranes is dependent upon the Raw Water influent
quality, pretreatment techniques and membrane design. Although the
influent water quality is susceptible to fluctuations during the life of
the Project, the DB/Operator in conjunction with Osmonics has been able to
establish lifetime replacement pricing for the membranes with an average
membrane life of four years. Osmonics has agreed to pricing that, if the
replacement life of the membranes is five years or greater, then the
savings will be approximately 4% of the annual operating costs. If the
replacement life of the membranes is two years, then the pricing is such
that the annual operating costs will increase by approximately 5%.
Cartridge filters will be replaced much more frequently and the pattern
will be established early on in the contract.
Although the average life of wells is approximately forty years, the
DB/Operator has assumed that one well will require complete replacement
within the life of this Contract. Also included are the costs for well
pulling, videos and overhauling vertical turbine pumps on a five-year
basis.
Other capital equipment scheduled for replacement every five years
includes: vehicles, computer systems, office furniture, tools and safety
equipment, and personnel replacement costs.
CONCLUSION:
The operation and maintenance requirements of the Project, under the
Service Contract are adequate for the full term of the Bonds. PSOMAS is of
the opinion that the operating costs included in the Service Contract are
reasonable, and the variable replacement cost for the membranes will not
have a significant cost impact to the annual operating costs. The only
other variables are labor and chemicals and experience indicates that any
variation in these costs should be minor.
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VI. ENVIRONMENTAL AND REGULATORY REQUIREMENTS
6.1 MAJOR PERMITTING AND REGULATORY REQUIREMENTS
The DB/Operator, as the prime contractor and operator of the Project, will
be responsible for implementation of mitigation measures incorporated in
the 1995 Expanded Initial Study/Mitigated Negative Declaration for the San
Juan Basin Groundwater Management and Facility Plan. Biological and
Archeological studies performed in January 2001 indicate that the RO
Facility site and well sites do not require mitigation for archeological,
suitable habitat for endangered species, and sensitive plant species. The
pipeline routing could require mitigation measures. These mitigation
measures could include: rerouting of the pipeline(s), relocation of the
well sites, and other mitigation measures. These mitigation measures would
constitute an UCC in accordance with the Service Contract.
6.1.1 CONSTRUCTION PERMIT
Permits required prior to construction of the Project include:
. Air Quality Management District (AQMD) - Permit to operate
Portable/Fixed Generator
. County of Orange - Pipeline Crossing Encroachment Permit
. California Occupational Safety and Health Act (CAL-OSHA) -
Title 24 Excavation Permit
. City of San Juan Capistrano - Grading permit, Architectural
review, CEQA mitigation.
. Southern California Regional Rail Authority/Metrolink Railroad
- Licenses required for boring under Right-of-Way
. California Department of Transportation (Caltrans) -
Encroachment permit required for crossing under the Interstate
5 Freeway
. Orange County Flood Control District - Permit to construct on
easement
. Orange County Fire Authority Approval
6.1.2 OPERATION PERMIT
Permits to operate the Project during the Acceptance Testing and to
provide Finished Water to the District's distribution system
include:
. Southeast Regional Reclamation Authority/Regional Water
Quality Control Board (SERRA/RWQCB) - Brine Discharge permit,
Well Flushing Discharge permit and Well Development Water
Discharge Permit
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. Orange County Health Department (OCHD) - Well Development
Permit
. California Department of Health Services (CADHS) - Permit to
operate the facility
Analysis:
The CADHS permit, which is required in order to supply Finished Water to
the District system, will not be issued on a final basis until after
review of the Acceptance Test results. The quality that the Finished Water
has to obtain is specified in the Service Contract and those
specifications were determined in accordance with CADHS standards. If the
Finished Water produced by the Project is within the specifications
contained in the Service Contract, there is no technical reason that CADHS
would not issue the operating permit.
Based upon the dates for start of construction and provision of the
Finished Water, the required permits have been identified and there is
sufficient time to procure all the necessary permits without delay to the
Project. The permits to be issued by SERRA, RWQCB, and CADHS are required
to produce Finished Water and provide it to the District distribution
system. Based on the preliminary construction schedule these permits are
not required until August 2004, but if delayed, it is possible that the
MWD GRP Agreement Date of December 4, 2004, for Delivery of Finished Water
may be jeopardized.
CONCLUSION:
The required permits and easements to begin construction were obtained
prior to the commencement of construction, which occurred on November
25, 2002. The remainder of the permits and easements to complete
construction will be acquired on a sequential basis prior to the
construction of the various components of the Project. These outstanding
permits and easements are identified and expected to be obtained in time
to prevent any delay to construction of the Project. The operating permits
required to comply with the Finished Water date of December 4, 2004, are
identified and scheduled to be obtained in sufficient time to support the
completion of the Project. Based upon a review of the preliminary
construction schedule for the Project, there is sufficient time to obtain
these permits prior to the December 4, 2004 MWD Finished Water date.
6.2 SAFETY PLAN
ECO has an exemplary safety record, receiving awards from the California
Water Environment Association. Implementation of a safety program will be
the responsibility of the Regional Safety Officer. OSHA compliance will be
part of the comprehensive safety and training program and will be
appropriately administered based on the level of involvement of
operations. In addition to OSHA health and safety training, additional
safety training, including CPR, will be conducted. Use of classroom
exercises, discussions, hands-on practice along with instructor/student
guides, and support media
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will help to enable each staff member with the proper support and
training. More specific information is included in the ECO Safety Manual,
dated January 1997, and copies of this information will be distributed to
each staff member. Any operation and maintenance personnel that will be
involved with hazardous materials handling or hazardous waste site
operations will receive special training that will include:
. Confined Spaces,
. Chlorine Safety,
. Hazardous Gases and Detectors,
. Hazardous Material Response Team Training, and
. Hazardous Communications Standard (right-to-know).
Policies and procedures regarding safety will be welcomed by peer
evaluators such as insurance carriers and regulatory bodies to ensure
proper safety compliance. Weekly safety meetings will be held to update
employees on current safety practices as well as address any current
safety practices with hands-on training. The Regional Safety Officer will
review and edit the current Safety Manual to assure all aspects of
training are administered to the employees.
In addition to the safety compliance, training and procedures, there are
the physical precautions of the site to safeguard. Appropriate signage and
fencing will be placed around the building and well sites. Channels will
include plates or grating covers to form walkways and all mechanical
equipment will be supplied with shaft guards and other safety devices will
be replaced if they are removed for any reason. Extinguishers, such as the
multi-purpose ABC dry chemical type, will be strategically located
throughout the plant along with first aid kits. All personnel are required
to comply with the established procedures as mentioned above and good
housekeeping and record-keeping practices will be enforced. A hazardous
materials plan will include a program that will address the special
handling of hazardous materials in compliance with OSHA standards.
CONCLUSION:
PSOMAS is of the opinion that the safety plan is adequate and is in
compliance with industry requirements and CAL-OSHA.
6.3 SECURITY PLAN
The security plan is designed to address the specific needs of the
operations. Some of the issues are addressed by design (lighting, fencing,
well enclosures, landscaping, etc.) and some by operations (graffiti
control, water quality monitoring, local safety authority coordination,
etc.). In addition to the design and operations, coordination with local
authorities (city, police, fire) will also be implemented, if needed, to
maintain security for both the operation at the sites and for the
community at-large.
Further security plans include personnel that will be equipped to handle
unusual emergency situations such as earthquakes, the potential release of
hazardous materials, flooding, sudden storms, power loss, and other
critical conditions.
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Management and technical staff will:
. Evaluate existing emergency response plans,
. Complete, update, or prepare these plans as necessary,
. Develop contingency or fall-back plans, and
. Train employees on implementation of the plans.
CONCLUSION:
PSOMAS is of the opinion that the security plan is adequate and is in
compliance with all regulatory agencies on the local and state level.
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VII. RELEVANT PROJECT CONTRACTS/AGREEMENTS (PROJECT AGREEMENTS)
The Project Agreements, discussed in this Section, are established for the
design, construction and operation of the San Juan Basin Project, a 5.14
MGD brackish well water RO Facility, well sites, feed water, distribution,
and disposal pipe lines and related items. The Project will be financed
with tax-exempt governmental purpose bonds. Specifically, the bonds will
be Lease Revenue Bonds issued by the Authority under the terms and
conditions contained in the Trust Agreement dated as of December 1, 2002,
by and among the Authority, the District and BNY Western Trust Company as
Trustee.
The City will lease, under the Property Lease dated as of December 1,
2002, by and between the City and the Authority, various real property
sites on which portions of the Service Contract Project Improvements are
to be constructed, to the Authority. The Authority will then lease, under
the Lease Agreement dated December 1, 2002, by and between the Authority
and the District, the to-be-constructed Project to the District. The
District is a subsidiary district of the City and the Lease Payments are
primarily secured by water revenues of the District. Lease Payments, from
the Lease Agreement, will be assigned to a Trustee for the benefit of the
bondholders. The Authority will hold title to the Project during the term
of the Lease.
7.1 PROJECT IMPLEMENTATION AGREEMENT
The Implementation Agreement is entered into between the Authority and the
City acting as the governing body for the District for the purpose of
complying with sections of previous agreements.
The Implementation Agreement specifies that the District and City's
allocated interest in the Project's water rights shall be in the amount of
5,800 acre-feet per year. The Agreement also specifies that since the
District is the only Authority member participating in the Project, major
decisions and approvals concerning the Project shall be made by the
District in consultation with the Authority.
The Authority will also take no action which would impair the Project's
ability to extract up to 5,800 acre-feet per year or impair the MWD
Agreement between MWD, MWDOC and the Authority. The subsidy described in
the MWD Agreement will be irrevocably committed to the Project and the
Authority will not exercise its right to terminate the MWD Agreement
without the prior written consent of the District.
7.2 METROPOLITAN WATER DISTRICT OF SOUTHERN CALIFORNIA PROJECT AGREEMENT
This review is based upon the 1998 San Juan Basin Project Agreement
between MWD, MWDOC and the Authority, dated December 4, 1998 and the First
Amendment dated October 15, 2002.
MWDOC, a Metropolitan Water District member agency, and the Authority have
determined that it would be more costly to develop its groundwater sources
than to
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purchase an equivalent amount of MWD treated water from MWDOC.
Consequently, MWD, MWDOC and the Authority have determined that it would
be mutually beneficial for the Authority to increase production from the
Lower San Juan Basin by treating the groundwater through developing and
operating a new treatment facility. Accordingly, MWD, in accordance with
its GRP, desires to assist MWDOC and the Authority with the cost of
treating the degraded groundwater in excess of the cost of treated Full
Service water from MWD. This GRP assistance is equal to the sum of the
Project unit cost and deferred cost minus the MWD cost for treated water,
but is capped at $250 per acre-foot produced annually by the facility. The
Project will increase domestic and municipal production by producing a
minimum of 4,800 acre-feet of Finished Water per year from the Lower San
Juan Basin.
The First Amendment to this Project Agreement restates that under the MWD
Agreement the Authority is the sole owner of all Project facilities and is
solely responsible for development of the Project. The District, as agent
for the Authority, will agree to cause the Service Contract Project
Improvements to be acquired, constructed, delivered, and installed and the
Authority will have no responsibility with respect to the acquisition,
construction, delivery and installation of the Service Contract Project
Improvements. The District will operate the Project as the contracted
operator of the Authority during the term of the Lease Agreement and
pursuant to the Project Lease and Implementation Agreement. The
Implementation Agreement transfers the responsibility for developing,
operating and maintaining the Project from the Authority to the District.
The MWD Agreement further defines those costs, under the Service Contract,
which can be used in calculating the fixed cost and subsequently the Final
GRP contribution, capped at $250 per acre-foot.
Amortization of the capital costs and operating costs indicate, as shown
in Section 8.2, Operating and Maintenance Costs and Section 8.3 Amortized
Costs, that the full GRP of $250 per acre-foot per year will be required
for the full term of the Contract.
The MWD Agreement will automatically terminate if either of the following
schedule parameters are not met:
Per the Agreement:
. Construction of the Project must commence no later than
December 4, 2002, and
. Allowable yield must be produced by the Project no later than
December 4, 2004.
If construction has commenced previous to December 4, 2002, MWD will
consider a request from the District and MWDOC to amend the agreement to
provide additional time for commencement of production of Allowable Yield,
if the December 4, 2004 date for production of Finished Water is not met.
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7.3 SERVICE CONTRACT
The Service Contract for the Design, Construction, and Operation of the
San Juan Basin Desalter Project, dated as of September 3, 2002, between
the District and ECO provides for the design, construction and operation
of the Project for a term of twenty years following the Provisional
Acceptance Date (or, if Provisional Acceptance is not certified by the
DB/Operator, the Acceptance Date).
7.3.1 CONSTRUCTION
COMMENCEMENT OF CONSTRUCTION
On the Construction Date, the DB/Operator will commence construction
of the Project on a design/build basis and shall undertake to
perform the work in accordance with the Contract Standards. To the
extent that any design/build work is not in accordance with the
Contract Standards, the DB/Operator has an obligation to rebuild,
repair, and/or replace such work so that it complies with the
Contract Standards.
In performing the design/build work, the DB/Operator shall perform
the work so that the Project is suitable and adequate for the
production of Finished Water in accordance with the MWD Agreement
(as described below).
DESIGN/BUILD PRICE
The District shall pay the DB/Operator the Design/Build Price for
the design/build work on a milestone basis as set forth in the
Service Contract. The Design/Build Price is the sum of the Fixed
Design/Build Price and the Fixed Design/Build Price Adjustments. The
Fixed Design/Build Price is $25,030,670. The Fixed Design/Build
Price Adjustments are based upon change orders issued by the
District, UCCs and adjustments caused by certain San Diego Gas and
Electric Company interconnection costs.
The District is currently negotiating with DB/Operator for a
modification to the Design/Build Work which would modify the Plant
foundation construction method and would result in a reduction of
the Fixed Design/Build Price from $25,030,607 to $24,190,607. No
assurances can be made, however, that such negotiations will be
successful and that the Modification to the Design/Build Work and
corresponding Fixed Design/Build Price reduction will occur.
7.3.2 ACCEPTANCE TESTING AND REQUIREMENTS
Achievement of Provisional Acceptance, Acceptance and Final
Completion (as each is described below) are independent measures of
the DB/Operator's performance.
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SUBSTANTIAL COMPLETION
Prior to conducting the tests necessary for Acceptance to be
achieved ("Acceptance Tests"), the DB/Operator shall have obtained
Substantial Completion, which includes each of the following:
. Construction of the Project improvements in accordance with
the Contract Standards has been substantially completed;
. Both water treatment trains are operational;
. A preliminary or temporary certificate of occupancy has been
issued (if required by applicable law);
. The DB/Operator is authorized by all appropriate governmental
agencies (including CADHS) to perform the procedures necessary
to achieve Acceptance and conduct Acceptance Testing;
. Utilities required are connected and fully functional;
. The DB/Operator has delivered to the District written
certifications from the equipment manufacturers that all major
items of equipment have been tested and are fully functional;
. The District has approved the DB/Operator's plan for
Acceptance Testing; and
. The DB/Operator has submitted certification that all the
foregoing requirements have been satisfied.
PRE-ACCEPTANCE TEST RAW WATER QUALITY ANALYSIS
The DB/Operator shall begin to conduct a pre-acceptance test Raw
Water quality analysis at least 120 days prior to the earlier of
September 1, 2004, as such date may be extended for UCCs (the
"Scheduled Acceptance Date") or the date upon which the DB/Operator
plans to begin Acceptance Testing. Such pre-acceptance test will be
conducted to determine that the Raw Water quality is within the
design Raw Water parameters set forth in the Service Contract. If
this test determines that the Raw Water quality is outside the
parameters, the DB/Operator shall, within 30 days, provide an
assessment of the potential impact of the non-conformity with a
discussion of possible UCC mitigating measures.
ACCEPTANCE TESTING; ACCEPTANCE DATE CONDITIONS
The DB/Operator shall conduct the Acceptance Test in accordance with
the Service Contract and the Acceptance Test Plan. The following
conditions must occur in order for the Acceptance Date to occur:
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. Each of the conditions for the commencement of construction
shall be and remain satisfied as of the Acceptance Date;
. Substantial Completion shall have occurred;
. CADHS has issued its approval and it is lawful to introduce
Finished Water into the District's water system;
. All governmental approvals required under applicable law shall
have been obtained;
. The DB/Operator shall have completed all required Acceptance
Tests and shall have demonstrated satisfaction of the
Acceptance Test Procedures and Standards; and
. There shall be no event of default by the DB/Operator under
the Service Contract or by the Guarantor under the Service
Contract Guaranty.
PROVISIONAL ACCEPTANCE
The DB/Operator can certify Provisional Acceptance after completion
of the Acceptance Test, upon written certification to the District
that in its judgment all the Acceptance Date conditions have been
met. Within 30 days of Provisional Acceptance, the DB/Operator shall
furnish the District with a written report describing and certifying
the Acceptance Test conducted and the results. The District has 60
days to notify the DB/Operator if it concurs that the Acceptance
Date conditions have been met. If the District concurs, the
Acceptance Date will be deemed to have been met on a permanent basis
as of the date of Provisional Acceptance. If the District disagrees
and does not concur with the certification of Provisional
Acceptance, either party can refer the dispute to non-binding
mediation. If either party so elects, judicial proceedings can be
initiated 120 days after the Districts disagreement with the
Provisional Acceptance.
The DB/Operator shall achieve Provisional Acceptance on or before
December 4, 2004. If the DB/Operator does not achieve Provisional
Acceptance on or before such date, the DB/Operator shall pay the
District liquidated damages in an amount equal to the Lease Payments
(including payments with respect to both interest and principal)
accrued by the District on a daily basis, up to the end of the
Extension Period and thereafter until any termination of the Service
Contract for an event of default by the DB/Operator.
Provisional Acceptance and Acceptance shall be determined without
regard to the MWD Agreement. The DB/Operator has the right to avoid
termination of the MWD Agreement through production of Allowable
Yield, without regard to the requirements as to Provisional
Acceptance and Acceptance.
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7.3.3 MWD AGREEMENT
MWD, which supplies imported water for the remainder of the
District's water requirements, entered into an agreement with the
Authority to provide to the Authority an annual subsidy of up to
$250 per acre-foot of treated groundwater produced in order to
encourage the use of local supplies and attempt to equate the costs
of supply from groundwater to MWD imported water. The Authority has
irrevocably assigned the rights to this subsidy to the District. In
order to receive this subsidy, the Project must begin construction
by December 2002 and supply treated groundwater to the District's
distribution system by December 2004.
In the event that the MWD Agreement is terminated as a result of
failure to commence construction or deliver Finished Water by the
dates in the MWD Agreement and the failure is not due to District
Fault or UCCs, the DB/Operator shall pay the District for each
contract year during the term of the Service Contract an amount
equal to the number of acre-feet of Finished Water actually demanded
by the District multiplied by the amount of the Final GRP
contribution that the District would have received, if the MWD
Agreement had not been canceled. These liquidated damages shall be
applied as a credit against the Service Fee payment. In the event
that the DB/Operator fails to achieve Acceptance by the Scheduled
Acceptance Date or during the extension period, an event of default
will be deemed to have occurred and the District shall have the
right to terminate the Service Contract.
7.3.4 OPERATION
Upon occurrence of Provisional Acceptance, the Operation Period
shall commence and all Operation Period rights and obligations of
all parties shall apply on a permanent basis. Commencing on the
Provisional Acceptance Date (or, if Provisional Acceptance is not
certified by the DB/Operator, the Acceptance Date) the DB/Operator
shall operate and manage the Project on a 24-hour, 7-day per week
basis and shall treat Raw Water, produce and supply Finished Water,
dispose of plant by-products, secure government approvals and manage
the Project to comply with the Contract Standards. The operation
services must be performed in compliance with applicable law, the
operation and maintenance manual prepared by ECO for the Project and
ECO's computerized maintenance management system.
7.3.5 PERFORMANCE GUARANTEES
WATER TREATMENT GUARANTEE
The DB/Operator must operate the Project so as to treat Raw Water
and to produce and distribute Finished Water to the District's water
system in compliance with the requirements of applicable law and the
requirements set forth in the Service Contract.
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Except to the extent relived for UCCs or District Fault, the
DB/Operator shall pay the District liquidated damages in the amounts
set forth in the Service Contract for failure to comply with the
Water Treatment Guarantee. The liquidated damages set forth in the
Service Contract are as follows:
. $100 per day per Contract Year for Violation Number 1.
. $200 per day per Contract Year for Violation Number 2.
. $400 per day per Contract Year for Violation Number 3.
These liquidated damages are established to address minor,
occasional exceedences. Major or repeated unexcused failures of
compliance with the Water Treatment Guarantee are not intended to be
events of non-compliance to which liquidated damages would apply,
but are deemed to be breaches of the Service Contract for which the
District may seek actual damages and exercise its other remedies
under the Service Contract.
WATER DELIVERY GUARANTEE
The DB/Operator must use its best efforts, within the physical
capacity of the Plant, to meet the District's demand for the
delivery of Finished Water in accordance with the Service Contract.
Subject to certain exceptions if, in any Contract Year, the
DB/Operator fails to meet such Water Delivery Guarantee, the
cumulative amount of acre-feet shortfall minus the permissible
surplus deliveries will be subject to liquidated damages. The
liquidated damages for each acre-foot shortfall is equal to the sum
of: (1) MWD's Prevailing Full Service Water Rate (expressed in
dollars per acre-foot) plus, (2) the final GRP Contribution for that
Contract Year (expressed in dollars per acre-foot), plus, (3) the
administrative, operation and maintenance charged imposed by MWDOC
(expressed in dollars per acre-foot).
PRODUCTION EFFICIENCY GUARANTEE
Except to the extent caused by UCCs or District Fault, the
DB/Operator must operate the Project to achieve a Raw Water to
Finished Water production efficiency of no less than 80% of the Raw
Water volumes over the course of each Contract Year following the
Acceptance date.
HYDRAULIC TRANSMISSIONS GUARANTEE
Except to the extent caused by UCCs or District Fault, the
DB/Operator shall operate the Project so as to avoid the occurrence
of sudden, significant changes in the flow rate and pressure of
Finished Water delivered to the District's water system.
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7.3.6 DISTRICT'S REMEDIES FOR NON-COMPLIANCE WITH PERFORMANCE
GUARANTEES
If the DB/Operator fails to comply with any Performance Guarantee
and is not excused from performance as a result of an UCC or
District Fault, the DB/Operator shall, without relief under any
other Performance Guarantee, or in addition to any other remedy
provided in the Service Contract, allowed by applicable law or
required by a governmental body:
. Promptly notify the District of such non-compliance;
. Promptly provide to the District copies of any notices sent to
governmental bodies;
. Pay liquidated damages in the amounts provided in the Service
Contract;
. Pay any other resulting fines, damages, etc.;
. Take any actions necessary to comply with the Performance
Guarantees;
. Promptly prepare all public notifications required by applicable
law and submit such notifications for publication; and
. Assist the District with all public relations matters necessary
to adequately address any public concern caused by such
non-compliance.
7.3.7 RELEASES, LEAKS AND SPILLS
The DB/Operator shall operate the Project in such a manner that Raw
Water, Finished Water or plant by-products will not contaminate, or be
released, leak or spill on or into the environment. All costs
associated with the identification, testing, cleanup, removal, etc. of
any waste or material released, leaked or spilled from the Project and
the costs of performing any necessary remediation measures shall be
born by the DB/Operator (unless caused by an UCC or District Fault).
7.4 SERVICE CONTRACT GUARANTY AGREEMENT
The Guarantor, Southwest Water, absolutely, irrevocably and
unconditionally guarantees to the District the full and prompt performance
of each and all the obligations including the payment when due of each and
all payments to be credited or paid by the DB/Operator under the Service
Contract. The Guaranty Agreement specifically agrees that the District can
proceed first and directly against the Guarantor for any payments or
obligations that the DB/Operator fails to pay without exhausting its
remedies against the DB/Operator.
The District and Guarantor acknowledge that no security for the
Obligations of the Guarantor has been granted to the District as of the
date of this Agreement, but the
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security shall be granted to the District subsequent to the Contract Date
as set forth in the Service Contract.
The Service Contract Guaranty Agreement shall remain in effect until all
of the Obligations of the DB/Operator have been fully paid and performed.
The Service Contract Guaranty shall be effective irrespective as to when
the Construction Date occurs.
7.5 PROPERTY LEASE
The City and the Authority entered into the "Property Lease" Agreement,
whereby the City will lease the various real property sites required for
the Project on which the Service Contract Project Improvements are to be
constructed to the Authority. The Authority will then lease the sites and
the to be constructed Project Improvements to the District, pursuant to
the terms of the "Lease" Agreement, discussed below, in order to obtain
funds to finance the design, construction and installation of the Project
as described in the Service Contract.
The term of the Property Lease shall commence as of the Delivery Date for
the Bonds and will remain in effect until October 1, 2057.
7.6 LEASE AGREEMENT
Under the Lease Agreement, the Authority will sublease the Property to the
District. The Lease Agreement will, subject to the terms thereof, obligate
the District to make the Lease Payments to the Authority in an amount
equal to the principal and interest on the Bonds. On the Closing Date the
Authority agrees to deposit to the Project Account of the Project Trust
Fund created under the Trust Agreement a portion of the proceeds of the
Authority's sale of the Bonds. These funds will be utilized for the
construction of the Project.
The Lease Agreement provides for the design, construction and Acceptance
of the Project by the District through the DB/Operator in accordance with
the Service Contract, the use of Bond funds to reimburse the Design-Build
price, on a milestone basis, to the DB/Operator, the lease of a portion of
the RO Facility site and the RO Facility and related facilities by the
District and the payment of the Lease Payments to the Trustee in an amount
equal to the debt service on the Bonds. The Lease Agreement terminates
upon the payment of all the outstanding Bonds or the termination of the
Service Contract as a result of Default by the DB/Operator (subject to
Trustee and Insurer cure rights in accordance with the Service Contract).
Upon termination of the Lease Agreement, the title to the Project will
revert to the Authority, subject to the District's rights pursuant to the
Operating Lease Agreement.
The Lease Payments and other payments required to be made under the Lease
Agreement are a special obligation of the District payable solely from
Revenues and do not constitute a debt of the District in contravention of
any constitutional or statutory debt limitation or restriction. Except for
the pledge of Revenues, neither the faith and credit nor the taxing power
of the District is pledged to the payment of the Lease Payments. The
Property,
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subject to the Lease Agreement, improvements thereon and other assets of
the District are not pledged or available to the Trustee or Bondholders in
the event of termination of the Lease Agreement or default in Lease
Payments and no default will result in loss of the property, improvements
thereon or other assets of the District. The Lease Agreement specifies
that, except with respect to certain rights of the District to terminate
the Lease Agreement early, the obligation of the District is absolute and
unconditional and the District will not discontinue or suspend any Lease
Payments required to be made until such time as the Lease Payments are
paid in full. The District covenants that it will not issue or incur any
additional bonds, notes or obligations, which will have a priority in
payment out of Revenues over the Lease Payments.
Pursuant to the Trust Agreement, the Authority will assign all of its
rights, title, and interest in the Lease Agreement to the Trustee for the
benefit of Bondholders.
7.7 TRUST AGREEMENT
The Trust Agreement relating to the San Juan Basin Authority Lease Revenue
Bonds Issue of 2002 is entered into between the District, the Authority,
and BNY Western Trust Company (Trustee). This Agreement is entered into
for the purpose of holding the Trust Estate for the use and benefit of the
Bondholders.
The Bonds shall be issued on a conduit basis by the Authority and are
secured solely by the Trust Estate pledged under this Trust Agreement. The
Trust Estate consists principally of (1) all amounts received by the
Trustee for account of the District in connection with the Service
Contract Letter of Credit, and the Lease Agreement, including without
limitation, the Lease Payments, (2) all right, title and interest in the
Trustee benefit provisions pursuant to the Service Contract, and (3) the
amounts held in funds and accounts under the Trust Agreement pending
disbursement. The Authority assigns all its rights, title and interest in
the Lease Agreement to the Trustee and retains no right, title, or
interest therein. Pursuant to the Service Contract, the DB/Operator will
provide the Service Contract Letter of Credit with the District as
beneficiary. However, under the Trust Agreement, the District will
covenant to transfer to the Trustee for deposit into the Debt Service
Payment Account established under the Trust Agreement, all proceeds of any
drawing on the Service Contract Letter of Credit received by the District.
The Bonds are special obligations of the Authority and are secured by an
irrevocable pledge of, and are payable as to principal and interest from
the Trust Estate. In order to provide funds to construct the Service
Contract Project Improvements, the Authority has caused the Trustee to
authenticate and deliver the Bonds and from the proceeds of the sale of
the Bonds, the Trustee shall deposit the amounts provided into the various
funds of the Project Trust Fund. So long as the Lease Agreement is in
effect, all of the Lease Payments, made by the District constituting a
part of the Trust Estate payable to the Trustee, shall be paid directly to
the Trustee for distribution, in accordance with the Trust Agreement to
the Bondholders.
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7.8 OSMONICS CONTRACT
This review of the Osmonics scope and pricing is based upon a preliminary
proposal dated June 22, 2001 and the Osmonics letter dated November 1,
2002. All comments pertain to a review of the preliminary proposal and the
referenced letter.
Osmonics is to furnish the two Cartridge Filters, three RO High Pressure
Pumps, including a spare pump and can, two RO trains, including housings,
membranes, energy recovery booster, and the RO electrical panel, the
Chemical Injection Pump System, Chemical Feed Systems and the membrane
cleaning system.
Per the Osmonics letter dated November 1, 2002, Osmonics has agreed to a
variable pricing structure for membrane replacement. If the replacement
life of the membranes increases by 20%, then the annual savings in
operating costs is approximately 4%. If the membrane replacement life
decreases by 50%, then the annual operating costs increase by
approximately 5%. There is no change in the membrane replacement pricing
if the replacement life of the membranes is four years.
7.9 AGREEMENT FOR CONSTRUCTION - ARB, INC.
This review of the Construction Agreement between ECO Resources, Inc. and
ARB is based upon the undated and unsigned draft received December 6,
2002, scheduled for execution on December 8, 2002.
The DB/Operator has retained ARB to furnish all construction services that
the DB/Operator is required to perform under the Service Contract for a
Guaranteed Maximum Price of Sixteen Million Five Hundred Thousand Dollars
($16,500,000)(GMP). The GMP includes all costs of labor, supervision,
tools, equipment, supplies, materials, services, allowances, overhead,
profits, fees, taxes and other costs and expenses related to construction
of the Project. The GMP is based upon the scope of work described in the
Contract Documents, including the Project Design, as described in the
Service Contract. The work includes the following Project Elements as
described in the Service Contract:
. Plant
. Project Structures
. Project Equipment
. Additional Assets
. Project Wells
. Project Pipelines
. Raw Water Transmission Line
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. Booster Pumping Station
. Finished Water Transmission Line
. Concentrate Disposal Line
. Abandonment of the Existing Wells.
The contractor shall not be entitled to an adjustment in the GMP for costs
of any DB/Operator generated changes up to 1% of the GMP. The contractor
shall not be entitled to change in the GMP or contract time due to a
differing site condition except to the extent that the DB/Operator is
entitled to an adjustment in its compensation or time for performance
under the Service Contract.
The contractor is responsible for obtaining the construction related
permits. The contractor acknowledges that it is entering into the
Agreement on the basis of conceptual plans prepared by Boyle Engineering
and with knowledge of the District's requirements for the design and
construction of the Project as set forth in the Service Contract.
The Construction Agreement also includes specific dates upon which the
contractor will achieve Substantial Completion of the Work and Project
Acceptance. The contractor will be responsible for paying the DB/Operator
the following liquidated damages for each calendar day that expires after
the date for Substantial Completion and for each calendar day that expires
after the date for Acceptance until the foregoing events are achieved.
1 to 30 days $2,000 per day
31 to 60 days 3,000 per day
61 and beyond 4,000 per day
The Construction Agreement indicates that the rights, duties and
obligations of the DB/Operator and the contractor with regard to UCCs
shall be the same as those between the District and the DB/Operator as set
forth in the Service Contract.
The contractor will be compensated monthly based upon the Project Schedule
and the agreed Schedule of Values included in the Construction Agreement.
Each invoice is subject to ten percent (10%) retention, which retention
shall be reduced to five percent (5%) upon achievement of Substantial
Completion. The balance of the retention shall be paid upon Final
Completion. The contractor will secure completion of the Contract by
furnishing performance and payment bonds in the full amount of the
Contract Price. These bonds shall remain in effect for one year after the
date of Acceptance and shall be issued by surety insurers having an AM
Best rating of "A" or better. The contractor will also Warranty his work
for one (1) year after Acceptance.
CONCLUSION:
PSOMAS is of the opinion that based upon a review of the Project
Agreements, the terms of the Project Agreements will allow the DB/Operator
to meet its obligations under the Service Contract.
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VIII. PROJECT SCHEDULE AND COSTS
8.1 ENGINEERING, PROCUREMENT, CONSTRUCTION SCHEDULE AND COSTS
8.1.1 CONSTRUCTION SCHEDULE
These construction milestones are predicated on the executed Service
Contract and construction start no later that December 4, 2002. Start
dates, completion dates and duration of activities were obtained from the
preliminary schedule dated October 25, 2002, which has been included in
the Agreement for Construction. This schedule is subject to change based
upon final design, the start of procurement for major equipment items and
the Financing Date.
The schedule indicates that the geo-technical surveys started January 2002
and completed July 3, 2002. The design survey is scheduled to start
October 28, 2002, and completed November 15, 2002. The demolition plan
started October 28, 2002, and the demolition permit was acquired November
22, 2002. The foundation design, grading plan, plant layout, equipment and
mechanical layout, and the building plan started November 18, 2002 and
scheduled completion is February 6, 2003. Permit acquisition for the RO
Facility will start December 18, 2002 and complete February 13, 2003. The
design for the offsite pipelines, wells and Booster Pumping Station is
scheduled to start December 9, 2002, and complete January 16, 2003. The
permit acquisition for the offsite facilities is scheduled to start
January 17, 2003 and complete April 10, 2003. The procurement activities
for the RO trains, Fe/Mn filters, sand separators, chemical feed
equipment, miscellaneous process tanks and pumps, pre-fabricated
buildings, and well pumps and motors will take place between January 10,
2003 and March 14, 2003. Fabrication and delivery of the above equipment
will complete starting April 10, 2003 and ending September 23, 2003.
Mobilization, demolition and civil site work commenced November 25, 2002,
and will complete May 22, 2003. Foundation construction is scheduled to
start April 11, 2003 with the completion scheduled for October 7, 2003.
Pre-fabricated building installation is scheduled for August 5, 2003
through December 16, 2003. Fe/Mn equipment installation is scheduled for
September 24, 2003, RO equipment installation is scheduled for September
10, 2003, pipeline construction is scheduled for April 11, 2003, and well
drilling is scheduled to start April 11, 2003.
Acceptance Testing and permitting is scheduled to start May 11, 2004 and
be completed August 18, 2004. Provisional Acceptance is scheduled for
August 19, 2004.
Analysis:
If the DB/Operator has not received Acceptance/Provisional Acceptance by
the Service Contract Scheduled Date of September 1, 2004 or as adjusted by
approved changes or UCCs, the Extension Period of 547 days is in effect.
Liquidated damages equal to the Lease Payments (including payments with
respect to both interest and principal) are payable from December 5, 2004,
if Acceptance has not been achieved by December 4,
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2004. These liquidated damages are in addition to the liquidated damages
assessed due to cancellation of the MWD GRP contribution not caused by
UCCS or District Fault.
CONCLUSION:
PSOMAS is of the opinion that the preliminary construction schedule is
reasonable and includes sufficient contingency in the activity durations
in order to complete the Project within the parameters of the MWD
Agreement and the Service Contract.
8.1.2 CONSTRUCTION COSTS
The Service Contract dated September 2002 states the Fixed Design-Build
Price for the Engineering, Procurement and Construction as $25,030,607.
This price is estimated based upon the use of drilled pile foundations.
This amount is payable based upon the following Milestone Payment
Schedule. The DB/Operator is entitled to monthly payments based upon
completions of the indicated milestones as shown below:
PROJECT MILESTONES PROJECT DRAWS
Construction Date $ 2,971,966
Construction Date plus 30 Days $ 163,660
Construction Date plus 60 Days $ 163,660
Begin Foundation $ 773,300
Begin Well Drilling $ 490,980
33% Completion of Well Casings $ 490,980
67% Completion of Well Casings $ 490,980
Completion of Well Casings $ 490,980
Begin Pipeline Work $ 309,596
33% Complete Pipeline Work $ 354,596
67% Complete Pipeline Work $ 354,596
Complete Pipeline Work $ 354,596
Complete Foundation $ 1,691,152
Issue PO for Fe/Mn Filters $ 436,426
Issue PO for RO Equipment $ 763,746
Begin Bore $ 545,533
50% Bore Completion $ 545,533
Completion of Bore $ 545,533
Begin Creek Crossing $ 360,052
50% Completion of Creek Crossing $ 370,962
Completion of Creek Crossing $ 360,052
Begin Steel Framing $ 360,052
Complete Steel Framing $ 731,014
Delivery of Fe/Mn Filters $ 1,636,599
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Delivery of Backwash Tank Steel $ 818,300
Delivery of RO Equipment $ 2,045,749
60 Days after Delivery Fe/Mn Filters $ 545,533
60 Days After Delivery of Backwash Steel $ 272,767
60 Days After Delivery RO Equipment $ 681,916
Connection into SCRA $ 1,091,066
Completion of Strawberry Hill Pump Sta. $ 545,533
Test Pumping of Wells $ 545,533
Install Chemical Feed System $ 1,091,066
Completion of Well Enclosures $ 272,767
Install SCADA at Wells $ 272,767
Install SCADA at RO Building $ 545,533
Delivery of Chemicals at RO Plant $ 545,533
------------
Total $ 25,030,607
------------
The District is currently negotiating with DB/Operator for a modification
to the Design/Build Work which would modify the Plant foundation
construction method and would result in a reduction of the Fixed
Design/Build Price from $25,030,607 to $24,190,607. No assurances can be
made, however, that such negotiations will be successful and that the
modification to the Design/Build Work and corresponding Fixed Design/Build
Price reduction will occur.
CONCLUSION:
PSOMAS is of the opinion that the Project can be constructed for the Fixed
Design/Build Price included in the Service Contract and the construction
milestone payment schedule is reasonable.
8.2 OPERATIONS AND MAINTENANCE COSTS
The District has entered into the Service Contract with the DB/Operator,
whereby the DB/Operator will manage the design and construction of the
Project for which they will be reimbursed out of bond proceeds. Upon
acceptance of the Project, the DB/Operator will receive the Service Fee in
return for operational services over the twenty-year period.
Following Acceptance of the Project, the DB/Operator will be paid the
Service Fee in accordance with the following formula:
Service Fee = Base Operating Charge +/- Extraordinary Items
Charge/Credit
PSOMAS Page 59 12/6/2002
2SOU170100
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
8.2.1 BASE OPERATING CHARGE
The Base Operating Charge is calculated by adding the Fixed Component and
the Variable Component.
The Fixed Component is the sum of the Operations and Maintenance Component
($611,400), the Labor Component ($170,600), and the Replacement Component
($312,900) for a total for the first contract year of $1,094,900. The
Fixed Component will be adjusted in the second and each subsequent
contract year in accordance with the Adjustment Factor, discussed below.
The Variable Component consists of the First Water Demand Adjustment
Element, the Second Water Demand Adjustment Element, and the Electrical
Savings Element. The First Water Demand Adjustment Element is based upon
the District's annual demand of Finished Water in an amount greater than
4,800 AFY but less than 5,231 AFY. This amount is $151 per acre-foot for
every acre-foot greater than 4,800 AFY. The Second Water Demand Adjustment
Element is based upon the District's annual demand of Finished Water in an
amount greater than 5,231 AFY. This amount is $228 per acre-foot greater
than 5,231 AFY. The Electrical Savings Element will be a charge or credit
determined on the basis of the DB/Operator's use of electrical power in
accordance with the threshold limits specified in the Service Contract.
8.2.2 EXTRAORDINARY ITEMS CHARGE OR CREDIT
The Extraordinary Items component of the Service Fee, which may be a
charge or credit, will be equal to the sum of: (1) the amounts payable by
the District for increased operation, maintenance or other costs incurred
on account of the occurrence of an UCC; plus (2) the adjustments to the
Service Fee resulting from any Capital Modifications the costs of which
are payable by the District, or the benefits of which accrue to the
District, under the provisions of the Service Contract; minus (3) any
liquidated damages or Service Fee reductions due to the DB/Operator's
non-performance specifically provided for under any other provision of the
Service Contract; plus or minus (4) any other increase or reduction in the
Service Fee provided for under the Service Contract.
8.2.3 ADJUSTMENT FACTOR
The Service Fee will be adjusted in the second and each subsequent
contract year in accordance with the Adjustment Factor determined as
follows:
AF//n// = 1 + {(0.90) x [(CPI-U//n// - 1 - CPI-U//n//- 2)/CPI-U//n// - 2]}
Where,
AF//n// = The Adjustment Factor for Contract Year "n".
PSOMAS Page 60 12/6/2002
2SOU170100
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
CPI - U//n// - 1 = the average of the 12 month CPI -U values
occurring in the Contract Year preceding the Contract Year with
respect to which the calculation is to be made.
CPI - U//n// - 2 = The average of the 12 month CPI -U value
occurring in the Contract Year two years preceding the Contract
Year with respect to which the calculation is to be made.
CONCLUSION:
PSOMAS is of the opinion that the Operations Cost included in the Service
Contract is sufficient to operate and maintain the Project for the
Operation Period of the Service Contract.
8.3 PROJECT COST PROJECTIONS
The total projected costs over the Operation Period of the Service
Contract period, plus an additional period to and beyond the thirty-two
year Bond term for comparison with assumed MWD imported water rates, are
shown on the spreadsheet attached hereto. The costs have been projected on
the basis of 4,800 AFY and 5,231 AFY of Finished Water. The 4,800 AFY is
the Guaranteed Delivery Rate and the 5,231 AFY rate is the conservative
maximum capability of the distribution system per the Service Contract.
For estimating purposes, the CPI-U (Los Angeles, Riverside and Orange
County) has been assumed to increase at 3 percent per year for the entire
33-year analysis period. The rate used as per the Service Contract was 90
percent of that rate, or approximately 2.7 percent. Although the Service
Contract expires in 20 years from Acceptance, it was assumed that it would
be extended at the same terms and rates for analysis purposes.
The projected cost per acre-foot at 4,800 AFY varies from $931, for the
first full year of operation, to $1,231 in year-twenty, the last year of
the MWD GRP contribution. The cost per acre-foot at 5,231 AFY varies from
$887, in the first full year of operation to $1184, in year-twenty. As
indicated above, none of the rates met the initial goal of $681 ($431 plus
the GRP of $250) per acre-foot escalated for the twenty-year Service
Contract period. However, the value of a local treated water resource in
terms of reliability, operational flexibility, avoided costs for
additional storage and the ability to avoid future MWD rate increases and
charges for growth make the Project scenario attractive to the District.
It should be noted that in 2036, the first year following bond retirement,
the estimated cost of the Project water is within a few percentage points
of projected MWD imported water rates.
PSOMAS Page 61 12/6/2002
2SOU170100
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
PROJECT COST PROJECTION SCHEDULE
CAPISTRANO VALLEY WATER DISTRICT
PHASE 1 - DESALTER PROJECT
4,800 AFY
FISCAL YEAR 2003 2004 2005 2006 2007 2008 2009 2010
- -----------------------------------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 0 0 2,400 4,800 4,800 4,800 4,800 4,800
ANNUAL COSTS
O & M Component 611,400 627,908 644,861 662,273 680,154 698,518 717,378 736,747
Labor Component 170,600 175,206 179,937 184,795 189,785 194,909 200,171 205,576
Replacement Component 312,900 321,348 330,025 338,935 348,087 357,485 367,137 377,050
Annual Service Payment 1,094,900 1,124,462 1,154,823 1,186,003 1,218,025 1,250,912 1,284,686 1,319,373
Power Cost 1,031,250 1,059,094 1,087,689 1,117,057 1,147,217 1,178,192 1,210,003 1,242,674
--------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Operational Cost NA NA 1,121,256 2,303,060 2,365,243 2,429,104 2,494,690 2,562,046
Net Debt Service Rqmt. NA NA 1,511,017 2,164,267 2,159,142 2,161,342 2,156,573 2,154,836
--------- --------- --------- --------- --------- ---------
Total Annual Cost NA NA 2,632,273 4,467,327 4,524,385 4,590,446 4,651,263 4,716,882
Unit Cost per AF NA NA 1,097 931 943 956 969 983
MWD Subsidy (20 yr. @ 250/AF) NA NA 600,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Unit Cost per AF NA NA 250 250 250 250 250 250
--------- --------- --------- --------- --------- --------- --------- ---------
Net Annual Cost NA NA 2,032,273 3,267,327 3,324,385 3,390,446 3,451,263 3,516,882
Unit Cost per AF NA NA 847 681 693 706 719 733
UNIT COSTS
O & M Component 134 138 142 146 149 153
Labor Component 37 38 40 41 42 43
Replacement Component 69 71 73 74 76 79
Power 227 233 239 245 252 259
Unit Cost per AF 467 480 493 506 520 534
- -----------------------------------------------------------------------------------------------------------------------------------
RATE COMPARISONS (PER AF)
Annual Cost NA NA 1,097 931 943 956 969 983
MWD Subsidy Available NA NA 250 250 250 250 250 250
Net Annual Cost NA NA 847 681 693 706 719 733
Comparison Wholesale Rate 431 443 455 467 479 492 506 519
- -----------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 2011 2012 2013 2014 2015 2016 2017 2018 2019
- -----------------------------------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800 4,800
ANNUAL COSTS
O & M Component 756,639 777,069 798,050 819,597 841,726 864,453 887,793 911,763 936,381
Labor Component 211,126 216,827 222,681 228,694 234,868 241,210 247,722 254,411 261,280
Replacement Component 387,230 397,685 408,423 419,450 430,775 442,406 454,351 466,619 479,217
Annual Service Payment 1,354,996 1,391,581 1,429,154 1,467,741 1,507,370 1,548,069 1,589,867 1,632,793 1,676,878
Power Cost 1,276,226 1,310,684 1,346,072 1,382,416 1,419,742 1,458,075 1,497,443 1,537,874 1,579,396
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Operational Cost 2,631,222 2,702,265 2,775,226 2,850,157 2,927,111 3,006,143 3,087,309 3,170,666 3,256,274
Net Debt Service Rqmt. 2,155,867 2,154,536 2,150,842 2,149,029 2,148,801 2,150,483 2,148,939 2,144,170 2,143,479
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Cost 4,787,089 4,856,801 4,926,068 4,999,186 5,075,912 5,156,626 5,236,248 5,314,836 5,399,753
Unit Cost per AF 997 1,012 1,026 1,041 1,057 1,074 1,091 1,107 1,125
MWD Subsidy (20 yr. @ 250/AF) 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000
Unit Cost per AF 250 250 250 250 250 250 250 250 250
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Annual Cost 3,587,089 3,656,801 3,726,068 3,799,186 3,875,912 3,956,626 4,036,248 4,114,836 4,199,753
Unit Cost per AF 747 762 776 791 807 824 841 857 875
UNIT COSTS
O & M Component 158 162 166 171 175 180 185 190 195
Labor Component 44 45 46 48 49 50 52 53 54
Replacement Component 81 83 85 87 90 92 95 97 100
Power 266 273 280 288 296 304 312 320 329
Unit Cost per AF 548 563 578 594 610 626 643 661 678
- -----------------------------------------------------------------------------------------------------------------------------------
RATE COMPARISONS (PER AF)
Annual Cost 997 1,012 1,026 1,041 1,057 1,074 1,091 1,107 1,125
MWD Subsidy Available 250 250 250 250 250 250 250 250 250
Net Annual Cost 747 762 776 791 807 824 841 857 875
Comparison Wholesale Rate 533 548 563 578 593 609 626 643 660
- -----------------------------------------------------------------------------------------------------------------------------------
Notes:
1. O&M Costs per Service Contract between CVWD and ECO Resources, Inc.
dated September 3, 2002.
2. Annual Cost Escalation based on 90% of assumed 3% CPI increase, or 0.27%
per year.
3. Costs for first two years (in italics) only used for escalation
purposes, as first fiscal year of operation is 2005.
4. Net Debt Service from DBC Finance run dated September 10, 2002.
5. Power Costs based on Guaranteed Maximum Electricity Utilization
(Appendix 10 of Service Contract) and $0.125 per Kwh in FY 2003 escalated
per Note 2.
6. ECO Contract expires after 20 years but extension is assumed using same
operating cost parameters to end of bond term and beyond to determine water
rate comparison to and beyond bond retirement.
7. Assumed first FY of operation (2005) generates 2,400 AF and Total Annual
Cost is equal to half of normal full-year Fixed O&M and Power Cost plus
first six months of debt service not funded by capitalized interest.
8. Since Met Subsidy runs out half way through 2025 (20 years), comparison
rate is figured with $125/AF subsidy -vs- $250/AF and comparison is skewed.
PSOMAS Page 62 12/6/2002
2SOU170100
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
PROJECT COST PROJECTION SCHEDULE
CAPISTRANO VALLEY WATER DISTRICT
PHASE 1 - DESALTER PROJECT
4,800 AFY
FISCAL YEAR 2020 2021 2022 2023 2024 2025
- ----------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 4,800 4,800 4,800 4,800 4,800 4,800
ANNUAL COSTS
O & M Component 961,663 987,628 1,014,294 1,041,680 1,069,805 1,098,690
Labor Component 268,335 275,580 283,020 290,662 298,510 306,569
Replacement Component 492,156 505,445 519,092 533,107 547,501 562,283
Annual Service Payment 1,722,154 1,768,652 1,816,406 1,865,449 1,915,816 1,967,543
Power Cost 1,622,040 1,665,835 1,710,812 1,757,004 1,804,443 1,853,163
--------- --------- --------- --------- --------- ---------
Total Annual Operational Cost 3,344,194 3,434,487 3,527,218 3,622,453 3,720,259 3,820,706
Net Debt Service Rqmt 2,141,855 2,141,854 2,138,355 2,141,104 2,134,979 2,086,684
--------- --------- --------- --------- --------- ---------
Total Annual Cost 5,486,049 5,576,341 5,665,573 5,763,557 5,855,238 5,907,390
Unit Cost per AF 1,143 1,162 1,180 1,201 1,220 1,231
MWD Subsidy (20 yr. @ 250/AF) 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 600,000
Unit Cost per AF 250 250 250 250 250 250
--------- --------- --------- --------- --------- ---------
Net Annual Cost 4,286,049 4,376,341 4,465,573 4,563,557 4,655,238 5,307,390
Unit Cost per AF 893 912 930 951 970 1,106
UNIT COSTS
O & M Component 200 206 211 217 223 229
Labor Component 56 57 59 61 62 64
Replacement Component 103 105 108 111 114 117
Power 338 347 356 366 376 386
Unit Cost per AF 697 716 735 755 775 796
- ----------------------------------------------------------------------------------------------------------
RATE COMPARISONS (PER AF)
Annual Cost 1,143 1,162 1,180 1,201 1,220 1,231
MWD Subsidy Available 250 250 250 250 250 125
Net Annual Cost 893 912 930 951 970 1,106
Comparison Wholesale Rate 678 696 715 734 754 775
- ----------------------------------------------------------------------------------------------------------
FISCAL YEAR 2026 2027 2028 2029 2030 2031
- ----------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 4,800 4,800 4,800 4,800 4,800 4,800
ANNUAL COSTS
O & M Component 1,128,355 1,158,820 1,190,108 1,222,241 1,255,242 1,289,133
Labor Component 314,847 323,348 332,078 341,044 350,252 359,709
Replacement Component 577,465 593,057 609,069 625,514 642,403 659,748
Annual Service Payment 2,020,667 2,075,225 2,131,256 2,188,800 2,247,897 2,308,590
Power Cost 1,903,199 1,954,585 2,007,359 2,061,558 2,117,220 2,174,385
--------- --------- --------- --------- --------- ---------
Total Annual Operational Cost 3,923,865 4,029,810 4,138,615 4,250,357 4,365,117 4,482,975
Net Debt Service Rqmt 947,013 945,389 942,013 941,763 944,389 939,889
--------- --------- --------- --------- --------- ---------
Total Annual Cost 4,870,878 4,975,199 5,080,628 5,192,120 5,309,506 5,422,864
Unit Cost per AF 1,015 1,036 1,058 1,082 1,106 1,130
MWD Subsidy (20 yr. @ 250/AF) 0 0 0 0 0 0
Unit Cost per AF 0 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Net Annual Cost 4,870,878 4,975,199 5,080,628 5,192,120 5,309,506 5,422,864
Unit Cost per AF 1,015 1,036 1,058 1,082 1,106 1,130
UNIT COSTS
O & M Component 235 241 248 255 262 269
Labor Component 66 67 69 71 73 75
Replacement Component 120 124 127 130 134 137
Power 396 407 418 429 441 453
Unit Cost per AF 817 840 862 885 909 934
- ---------------------------------------------------------------------------------------------------------
RATE COMPARISONS (PER AF)
Annual Cost 1,015 1,036 1,058 1,082 1,106 1,130
MWD Subsidy Available 0 0 0 0 0 0
Net Annual Cost 1,015 1,036 1,058 1,082 1,106 1,130
Comparison Wholesale Rate 795 817 839 862 885 909
- ---------------------------------------------------------------------------------------------------------
FISCAL YEAR 2032 2033 2034 2035 2036
- ----------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 4,800 4,800 4,800 4,800 4,800
ANNUAL COSTS
O & M Component 1,323,940 1,359,686 1,396,398 1,434,101 1,472,821
Labor Component 369,421 379,396 389,639 400,160 410,964
Replacement Component 677,561 695,855 714,643 733,939 753,755
Annual Service Payment 2,370,922 2,434,937 2,500,680 2,568,199 2,637,540
Power Cost 2,233,093 2,293,387 2,355,308 2,418,901 2,484,212
--------- --------- --------- --------- ---------
Total Annual Operational Cost 4,604,015 4,728,324 4,855,989 4,987,100 5,121,752
Net Debt Service Rqmt 958,569 964,388 964,139 (117,399) 0
--------- --------- --------- --------- ---------
Total Annual Cost 5,562,584 5,692,712 5,820,128 4,869,701 5,121,752
Unit Cost per AF 1,159 1,186 1,213 1,015 1,067
MWD Subsidy (20 yr. @ 250/AF) 0 0 0 0 0
Unit Cost per AF 0 0 0 0 0
--------- --------- --------- --------- ---------
Net Annual Cost 5,562,584 5,692,712 5,820,128 4,869,701 5,121,752
Unit Cost per AF 1,159 1,186 1,213 1,015 1,067
UNIT COSTS
O & M Component 276 283 291 299 307
Labor Component 77 79 81 83 86
Replacement Component 141 145 149 153 157
Power 465 478 491 504 518
Unit Cost per AF 959 985 1,012 1,039 1,067
- ---------------------------------------------------------------------------------------------------------
RATE COMPARISONS (PER AF)
Annual Cost 1,159 1,186 1,213 1,015 1,067
MWD Subsidy Available 0 0 0 0 0
Net Annual Cost 1,159 1,186 1,213 1,015 1,067
Comparison Wholesale Rate 933 958 984 1,011 1,038
- ---------------------------------------------------------------------------------------------------------
Notes:
1. O&M Costs per Service Contract between CVWD and ECO Resources, Inc.
dated September 3, 2002.
2. Annual Cost Escalation based on 9
3. Costs for first two years (in italics) only used for escalation
purposes, as first fiscal year of operation is 2005.
4. Net Debt Service from DBC Finance run dated September 10, 2002.
5. Power Costs based on Guaranteed Maximum Electricity Utilization
(Appendix 10 of Service Contract) and $0.125 per Kwh in FY 2003 escalated
per Note 2.
6. ECO Contract expires after 20 years but extension is assumed using
same operating cost parameters to end of bond term and beyond to determine
water rate comparison to and beyond bond retirement.
7. Assumed first FY of operation (2005) generates 2,400 AF and Total
Annual Cost is equal to half of normal full-year Fixed O&M and Power Cost
plus first six months of debt service not funded by capitalized interest.
8. Since Met Subsidy runs out half way through 2025 (20 years),
comparison rate is figured with $125/AF subsidy -vs- $250/AF and comparison
is skewed.
PSOMAS Page 63 12/6/2002
2SOU170100
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
PROJECT COST PROJECTION SCHEDULE
CAPISTRANO VALLEY WATER DISTRICT
PHASE 1 - DESALTER PROJECT
5,231 AFY
FISCAL YEAR 2003 2004 2005 2006 2007 2008 2009 2010
- ----------------------------------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 0 0 2,400 5,231 5,231 5,231 5,231 5,231
ANNUAL COSTS
O & M Component 611,400 627,908 644,861 662,273 680,154 698,518 717,378 736,747
Labor Component 170,600 175,206 179,937 184,795 189,785 194,909 200,171 205,576
Replacement Component 312,900 321,348 330,025 338,935 348,087 357,485 367,137 377,050
First Demand Adj. Element 65,081 66,838 68,643 70,496 72,400 74,354 76,362 78,424
--------- --------- --------- --------- --------- --------- --------- ---------
Annual Service Payment 1,159,981 1,191,300 1,154,823 1,256,499 1,290,425 1,325,266 1,361,048 1,397,797
Power Cost 1,126,000 1,156,402 1,187,625 1,219,691 1,252,622 1,286,443 1,321,177 1,356,849
--------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Operational Cost NA NA 1,121,256 2,476,190 2,543,047 2,611,709 2,682,225 2,754,646
Net Debt Service Rqmt. NA NA 1,511,017 2,164,267 2,159,142 2,161,342 2,156,573 2,154,836
--------- --------- --------- --------- --------- ---------
Total Annual Cost NA NA 2,632,273 4,640,457 4,702,189 4,773,051 4,838,798 4,909,482
Unit Cost per AF NA NA 1,097 887 899 912 925 939
MWD Subsidy (20 yr @ 250/AF) NA NA 600,000 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750
Unit Cost per AF NA NA 250 250 250 250 250 250
--------- --------- --------- --------- --------- --------- --------- ---------
Net Annual Cost NA NA 2,032,273 3,332,707 3,394,439 3,465,301 3,531,048 3,601,732
Unit Cost per AFY NA NA 847 637 649 662 675 689
UNIT COSTS
O & M Component 134 127 130 134 137 141
Labor Component 37 35 36 37 38 39
Replacement Component 69 65 67 68 70 72
First Demand Adj. Element 0 13 14 14 15 15
Power 227 233 239 246 253 259
Unit Cost per AF 468 473 486 499 513 527
- ----------------------------------------------------------------------------------------------------------------------------------
RATE COMPARISONS (AFY)
Annual Cost NA NA 1,097 887 899 912 925 939
MWD Subsidy Available NA NA 250 250 250 250 250 250
Net Annual Cost NA NA 847 637 649 662 675 689
Comparison Wholesale Rate 431 443 455 467 479 492 506 519
- -----------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 2011 2012 2013 2014 2015 2016 2017 2018 2019
- ------------------------------------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 5,231 5,231 5,231 5,231 5,231 5,231 5,231 5,231 5,231
ANNUAL COSTS
O & M Component 756,639 777,069 798,050 819,597 841,726 864,453 887,793 911,763 936,381
Labor Component 211,126 216,827 222,681 228,694 234,868 241,210 247,722 254,411 261,280
Replacement Component 387,230 397,685 408,423 419,450 430,775 442,406 454,351 466,619 479,217
First Demand Adj. Element 80,541 82,716 84,949 87,243 89,598 92,017 94,502 97,053 99,674
--------- --------- --------- -------- -------- --------- --------- --------- ---------
Annual Service Payment 1,435,537 1,474,297 1,514,103 1,554,983 1,596,968 1,640,086 1,684,368 1,729,846 1,776,552
Power Cost 1,393,484 1,431,108 1,469,748 1,509,431 1,550,186 1,592,041 1,635,026 1,679,171 1,724,509
--------- --------- --------- -------- -------- --------- --------- --------- ---------
Total Annual Operational Cost 2,829,021 2,905,405 2,983,850 3,064,414 3,147,154 3,232,127 3,319,394 3,409,018 3,501,061
Net Debt Service Rqmt. 2,155,867 2,154,536 2,150,842 2,149,029 2,148,801 2,150,483 2,148,939 2,144,170 2,143,479
--------- --------- --------- -------- -------- --------- --------- --------- ---------
Total Annual Cost 4,984,888 5,059,941 5,134,692 5,213,443 5,295,955 5,382,610 5,468,333 5,553,188 5,644,540
Unit Cost per AF 953 967 982 997 1,012 1,029 1,045 1,062 1,079
MWD Subsidy (20 yr @ 250/AF) 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750
Unit Cost per AF 250 250 250 250 250 250 250 250 250
--------- --------- --------- -------- -------- --------- --------- --------- ---------
Net Annual Cost 3,677,138 3,752,191 3,826,942 3,905,693 3,988,205 4,074,860 4,160,583 4,245,438 4,336,790
Unit Cost per AFY 703 717 732 747 762 779 795 812 829
Unit Costs
O & M Component 145 149 153 157 161 165 170 174 179
Labor Component 40 41 43 44 45 46 47 49 50
Replacement Component 74 76 78 80 82 85 87 89 92
First Demand Adj. Element 15 16 16 17 17 18 18 19 19
Power 266 274 281 289 296 304 313 321 330
Unit Cost per AF 541 555 570 586 602 618 635 652 669
- ------------------------------------------------------------------------------------------------------------------------------------
RATE COMPARISONS (PER AFY)
Annual Cost 953 967 982 997 1,012 1,029 1,045 1,062 1,079
MWD Subsidy Available 250 250 250 250 250 250 250 250 250
Net Annual Cost 703 717 732 747 762 779 795 812 829
Comparison Wholesale Rate 533 548 563 578 593 609 626 643 660
- ------------------------------------------------------------------------------------------------------------------------------------
Notes:
1. O&M Costs per Service Contract between CVWD and ECO Resources, Inc.
dated September 3, 2002.
2. Annual Cost Escalation based on 90% of assumed 3% CPI increase, or 0.27%
per year.
3. Costs for first two years (in italics) only used for escalation
purposes, as first fiscal year of operation is 2005.
4. Net Debt Service from DBC Finance run dated September 10, 2002.
5. Power Costs based on Guaranteed Maximum Electricity Utilization
(Appendix 10 of Service Contract) and $0.125 per Kwh in FY 2003 escalated
per Note 2.
6. ECO Contract expires after 20 years but extension is assumed using same
operating cost parameters to end of bond term and beyond to determine water
rate comparison to and beyond bond retirement.
7. Assumed first FY of operation (2005) generates 2,400 AF and Total Annual
Cost is equal to half of normal full-year Fixed O&M and Power Cost plus
first six months of debt service not funded by capitalized interest.
8. Since Met Subsidy runs out half way through 2025 (20 years), comparison
rate is figured with $125/AF subsidy -vs- $250/AF and comparison is skewed.
PSOMAS Page 64 12/6/2002
2SOU170100
INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
PROJECT COST PROJECTION SCHEDULE
CAPISTRANO VALLEY WATER DISTRICT
PHASE 1 - DESALTER PROJECT
5,231 AFY
FISCAL YEAR 2020 2021 2022 2023 2024 2025 2026 2027
- ------------------------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 5,231 5,231 5,231 5,231 5,231 5,231 5,231 5,231
ANNUAL COSTS
O & M Component 961,663 987,628 1,014,294 1,041,680 1,069,805 1,098,690 1,128,355 1,158,820
Labor Component 268,335 275,580 283,020 290,662 298,510 306,569 314,847 323,348
Replacement Component 492,156 505,445 519,092 533,107 547,501 562,283 577,465 593,057
First Demand Adj. Element 102,365 105,129 107,967 110,883 113,876 116,951 120,109 123,352
--------- --------- --------- --------- --------- --------- --------- ---------
Annual Service Payment 1,824,519 1,873,781 1,924,373 1,976,331 2,029,692 2,084,494 2,140,775 2,198,576
Power Cost 1,771,071 1,818,890 1,868,000 1,918,436 1,970,234 2,023,430 2,078,062 2,134,170
--------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Operational Cost 3,595,590 3,692,671 3,792,373 3,894,767 3,999,926 4,107,924 4,218,838 4,332,746
Net Debt Service Rqmt. 2,141,855 2,141,854 2,138,355 2,141,104 2,134,979 2,086,684 947,013 945,389
--------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Cost 5,737,445 5,834,525 5,930,728 6,035,871 6,134,905 6,194,608 5,165,851 5,278,135
Unit Cost per AF 1,097 1,115 1,134 1,154 1,173 1,184 988 1,009
MWD Subsidy (20 yr @ 250/AF) 1,307,750 1,307,750 1,307,750 1,307,750 1,307,750 653,875 0 0
Unit Cost per AF 250 250 250 250 250 250 0 0
--------- --------- --------- --------- --------- --------- --------- ---------
Net Annual Cost 4,429,695 4,526,775 4,622,978 4,728,121 4,827,155 5,540,733 5,165,851 5,278,135
Unit Cost per AFY 847 865 884 904 923 1,059 988 1,009
UNIT COSTS
O & M Component 184 189 194 199 205 210 216 222
Labor Component 51 53 54 56 57 59 60 62
Replacement Component 94 97 99 102 105 107 110 113
First Demand Adj. Element 20 20 21 21 22 22 23 24
Power 339 348 357 367 377 387 397 408
Unit Cost per AF 687 706 725 745 765 785 807 828
- ------------------------------------------------------------------------------------------------------------------------
RATE COMPARISONS (AFY)
Annual Cost 1,097 1,115 1,134 1,154 1,173 1,184 988 1,009
MWD Subsidy Available 250 250 250 250 250 125 0 0
Net Annual Cost 847 865 884 904 923 1,059 988 1,009
Comparison Wholesale Rate 678 696 715 734 754 775 795 817
- ------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 2028 2029 2030 2031 2032 2033 2034 2035 2036
- ------------------------------------------------------------------------------------------------------------------------------------
Water Quantity (AFY) 5,231 5,231 5,231 5,231 5,231 5,231 5,231 5,231 5,231
ANNUAL COSTS
O & M Component 1,190,108 1,222,241 1,255,242 1,289,133 1,323,940 1,359,686 1,396,398 1,434,101 1,472,821
Labor Component 332,078 341,044 350,252 359,709 369,421 379,396 389,639 400,160 410,964
Replacement Component 609,069 625,514 642,403 659,748 677,561 695,855 714,643 733,939 753,755
First Demand Adj. Element 126,682 130,103 133,615 137,223 140,928 144,733 148,641 152,654 156,776
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Annual Service Payment 2,257,938 2,318,902 2,381,512 2,445,813 2,511,850 2,579,670 2,649,321 2,720,853 2,794,316
Power Cost 2,191,793 2,250,971 2,311,747 2,374,165 2,438,267 2,504,100 2,571,711 2,641,147 2,712,458
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Operational Cost 4,449,730 4,569,873 4,693,260 4,819,978 4,950,117 5,083,770 5,221,032 5,362,000 5,506,774
Net Debt Service Rqmt. 942,013 941,763 944,389 939,889 958,569 964,388 964,139 (117,399) 0
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total Annual Cost 5,391,743 5,511,636 5,637,649 5,759,867 5,908,686 6,048,158 6,185,171 5,244,601 5,506,774
Unit Cost per AF 1,031 1,054 1,078 1,101 1,130 1,156 1,182 1,003 1,053
MWD Subsidy (20 yr @ 250/AF) 0 0 0 0 0 0 0 0 0
Unit Cost per AF 0 0 0 0 0 0 0 0 0
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net Annual Cost 5,391,743 5,511,636 5,637,649 5,759,867 5,908,686 6,048,158 6,185,171 5,244,601 5,506,774
Unit Cost per AF 1,031 1,054 1,078 1,101 1,130 1,156 1,182 1,003 1,053
UNIT COSTS
O & M Component 228 234 240 246 253 260 267 274 282
Labor Component 63 65 67 69 71 73 74 76 79
Replacement Component 116 120 123 126 130 133 137 140 144
First Demand Adj. Element 24 25 26 26 27 28 28 29 30
Power 419 430 442 454 466 479 492 505 519
Unit Cost per AFY 851 874 897 921 946 972 998 1,025 1,053
- ------------------------------------------------------------------------------------------------------------------------------------
RATE COMPARISONS (AFY)
Annual Cost 1,031 1,054 1,078 1,101 1,130 1,156 1,182 1,003 1,053
MWD Subsidy Available 0 0 0 0 0 0 0 0 0
Net Annual Cost 1,031 1,054 1,078 1,101 1,130 1,156 1,182 1,003 1,053
Comparison Wholesale Rate 839 862 885 909 933 958 984 1,011 1,038
- ------------------------------------------------------------------------------------------------------------------------------------
Notes:
1. O&M Costs per Service Contract between CVWD and ECO Resources, Inc.
dated September 3, 2002.
2. Annual Cost Escalation based on 9.
3. Costs for first two years (in italics) only used for escalation
purposes, as first fiscal year of operation is 2005.
4. Net Debt Service from DBC Finance run dated September 10, 2002.
5. Power Costs based on Guaranteed Maximum Electricity Utilization
(Appendix 10 of Service Contract) and $0.125 per Kwh in FY 2003 escalated
per Note 2.
6. ECO Contract expires after 20 years but extension is assumed using same
operating cost parameters to end of bond term and beyond to determine water
rate comparison to and beyond bond retirement.
7. Assumed first FY of operation (2005) generates 2,400 AF and Total Annual
Cost is equal to half of normal full-year Fixed O&M and Power Cost plus
first six months of debt service not funded by capitalized interest.
8. Since Met Subsidy runs out half way through 2025 (20 years), comparison
rate is figured with $125/AF subsidy -vs- $250/AF and comparison is skewed.
PSOMAS Page 65 12/6/2002
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CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
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INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
IX. ASSUMPTIONS AND CONSIDERATIONS USED
9.1 ASSUMPTIONS
This report has been prepared with written and verbal information received
from the ECO Team and the District. A complete review of the executed
Project Agreements is the basis for the Report. Also reviewed was the
unexecuted Construction Agreement between ECO and ARB and the unexecuted
Osmonics purchase order and clarification letter. This written information
was modified during conversations with Boyle Engineering who provided the
revised Conceptual Design Drawings, dated March 11, 2002, for review of
the Project. Additional information, which provided the basis for
evaluation of the design, construction operations and maintenance costs,
was received from ECO, the District, ARB, Osmonics and Boyle Engineering
in April, June, July, September, October and December 2002 and
incorporated in this report. A copy of the executed Service Contract was
furnished to PSOMAS in September 2002 and incorporated into the Report.
An investigation was made to determine the capabilities of ARB as to their
construction and financial capabilities as well as their reputation. This
investigation included contacting the California Contractors State License
Board, interviewing ARB over the phone, and verifying ARB's bonding
capabilities and rating with the bonding company.
The observations contained in this report were gained through utilizing
the above information, interpreting this information and arriving at the
conclusions, recommendations and evaluating the feasibility according to
Standard and Poor's Rating Group criteria, dated September 1997. In
providing this opinion of probable design, construction and operation
feasibility, it is understood that PSOMAS does not have control over costs
of labor, equipment, materials or the construction schedule and the
operations of the Project. The opinion as to the feasibility of the
Project contained herein is based on PSOMAS' qualifications and
experience. Actual estimates and costs may vary due to many circumstances,
but not limited to, changes in availability, cost of materials, variation
in feed water quality, methods and/or timing of construction and
operations and inflation. PSOMAS has made certain assumptions with respect
to conditions, which may occur in the future. While these assumptions
appear to be reasonable for the purpose of this report, they are dependent
upon future events that may differ from those assumed.
In addition, certain information used and relied upon herein was provided
by sources believed to be reliable. It is believed that the use of such
information and sources is reasonable for the purpose of this report;
however, some assumptions may vary significantly due to unanticipated
events and circumstances. This report summarizes the information available
and analysis through the date of the executed Service Contract, thus
changed conditions occurring after the date of this report could affect
the material presented.
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CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
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CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
X. CONCLUSIONS
10.1 CONCLUSIONS
Based upon the analysis and the conclusions presented in the Report,
PSOMAS is of the opinion that:
1. All of the Project Participants have the relevant experience and
financial capability to successfully complete the design,
construction and operation of the Project within the parameters of
the Service Contract.
2. The brackish groundwater treatment process proposed for this Project
will produce the quality and quantity of water required by the
Service Contract.
3. The site on which the RO Facility is to be located is adequate in
size and location and from an infrastructure and geotechnical
perspective is adequate for construction and operation of the RO
Facility. The sites for the wells do not meet the new requirements
that CADHS is enforcing, but these new requirements should not
significantly increase the capital and operating costs of the
Project.
4. There is sufficient unappropriated water within the San Juan Basin
to provide an adequate source of Raw Water for the Project for the
Operation Period of the Service Contract and beyond for the full
term of the Bonds.
5. The environmental site assessments have been accomplished in a
manner consistent with industry standards, using appropriate
industry protocols. The adopted Mitigated Negative Declaration for
the Project does not impose any conditions that are not common to
normal construction activities and should not cause any significant
delay or increased cost to the Project.
6. Based upon the Service Contract parameters, the preliminary design,
and the proposed equipment list, the Project will operate and
provide Finished Water within the Service Contract parameters for
the Operation Period of the Service Contract and beyond for the full
term of the Bonds.
7. The construction of the Project is similar to other projects
constructed by ARB and the construction of the Project can be
accomplished within the scope of the Service Contract, by the
Scheduled Acceptance Date and within the Fixed Design/Build Price
included in the Service Contract.
8. The Acceptance Test is sufficient to predict that the Project will
perform reliably for the Operation Period of the Service Contract
and beyond for the full term of the Bonds. This opinion is based
upon the assumption that the required preventative and scheduled
maintenance is performed in accordance with industry standards.
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INDEPENDENT ENGINEER'S REPORT
CAPISTRANO VALLEY WATER DISTRICT PHASE 1 DESALTER PROJECT
9. The operation and maintenance requirements of the Project, under the
Service Contract are adequate for the full term of the Bonds. The
operating costs included in the Service Contract are reasonable, and
the variable replacement cost for membranes will not have a
significant cost impact to the annual operating costs. The only
other variables are labor and chemicals and experience indicates
that any variation in these costs should be minor.
10. All of the required permits and easements to begin construction were
obtained prior to the commencement of construction, which occurred
on November 25, 2002. The remainder of the permits and easements to
complete construction will be acquired on a sequential basis prior
to the construction of the various components of the Project. These
outstanding permits and easements are identified and expected to be
obtained in time to prevent any delay to construction of the
Project. The operating permits required to comply with the Finished
Water date of December 4, 2004, are identified and scheduled to be
obtained in sufficient time to support the completion of the
Project. Based upon a review of the preliminary construction
schedule for the Project, there is sufficient time to obtain these
permits prior to the December 4, 2004 MWD Finished Water date.
11. The safety plan is adequate and is in compliance with industry
requirements and CAL-OSHA.
12. The security plan is adequate and is in compliance with all
regulatory agencies on the local and state level.
13. Based upon a review of the Project Agreements, the terms of the
Project Agreements will allow the DB/Operator to meet its
obligations under the Service Contract.
14. The preliminary construction schedule is reasonable and includes
sufficient contingency in the activity durations in order to
complete the Project within the parameters of the MWD Agreement and
the Service Contract.
15. The Project can be constructed for the Fixed Design/Build Price
included in the Service Contract and the construction milestone
payment schedule is reasonable.
16. The Operations Cost included in the Service Contract is sufficient
to operate and maintain the Project for the Operation Period of the
Service Contract.
PSOMAS Page 70 12/6/2002
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APPENDIX H
SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY
H-l
(This Page Intentionally Left Blank)
[LETTER HEAD OF AMBAC]
FINANCIAL QUARANTY INSURANCE POLICY
Obligor: Policy Number:
Obligations: Premium:
Ambac Assurance Corporation (Ambac), a Wisconsin stock insurance corporation, in
consideration of the payment of the premium and subject to the terms of this
Policy, hereby agrees to pay to The Bank of New York, as trustee, or its
successor (the "Insurance Trustee"), for the benefit of the Holders, that
portion of the principal of and interest on the above-described obligations (the
"Obligations") which shall become Due for Payment but shall be unpaid by reason
of Nonpayment by the Obligator.
Ambac will make such payments to the Insurance Trustee within one (1) business
day following written notification to Ambac of Nonpayment. Upon a Holder's
presentation and surrender to the Insurance Trustee of such unpaid Obligations
or related coupons, uncanceled and in bearer form and free of any adverse claim,
the Insurance Trustee will disburse to the Holder the amount of principal and
interest which is then Due for Payment but is unpaid. Upon such disbursement,
Ambac shall become the owner of the surrendered Obligations and/or coupons and
shall be fully subrogated to all of the Holder's rights to payment, thereon.
In cases where the Obligations are issued in registered form, the Insurance
Trustee shall disburse principal to a Holder only upon presentation and
surrender to the Insurance Trustee of the unpaid Obligation, uncanceled and free
of any adverse claim, together with an instrument of assignment, in form
satisfactory to Ambac and the Insurance Trustee duly executed by the Holder or
such Holder's duly authorized representative, so as to permit ownership of such
Obligation to be registered in the name of Ambac or its nominee. The Insurance
Trustee shall disburse interest to a Holder of a registered Obligation only upon
presentation to the Insurance Trustee of proof that the claimant is the person
entitled to the payment of interest on the Obligtion and delivery to the
Insurance Trustee of an instrument of assignment, in form satisfactory to Ambac
and the Insurance Trustee, duly executed by the Holder or such Holder's duly
authorized representative, transferring to Ambac all rights under such
Obligation to receive the interest in respect of which the insurance
disbursement was made . Ambac shall be subrogated to all of the Holders' rights
to paypment on registered Obligations to the extent of any insurance
disbursements so made.
In the event that a trustee or paying agent for the Obligations has notice that
any payment of principal of or interest on an Obligation which has become Due
for Payment and which is made to a Holder by or on behalf of the Obligor has
been deemed a preferential transfer and theretofore recovered from the Holder
pursuant to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court of competent jurisdiction, such Holder will be
entitled to payment from Ambac to the extent of such recovery if sufficient
Funds are not otherwise available.
As used herein, the term "Holder" means any person other than (i) the Obligor or
(ii) any person whose obligations constitute the underlying security or source
of payment for the Obligations who, at the time of Nonpayment, is the owner of
an Obligation or of a coupon relating to an Obligation. As used herein, "Due for
Payment", when referring to the principal of Obligations, is when the scheduled
maturity date or mandatory redemption date for the application of a required
sinking fund installment has been reached and does not refer to any earlier date
on which payment is due by reason of call for redemption (other than by
application of required sinking fund installments), acceleration or other
advancement of maturity; and, when referring to interest on the Obligations, is
when the scheduled date for payment of interest has been reached. As used
herein, "Nonpayment" means the failure of the Obligor to have provided
sufficient funds to the trustee or paying agent for payment in full of all
principal of and interest on the Obligations which are Due for Payment.
This Polfcy is noncancelable. The premium on this Policy is not refundable for
any reason, including payment of the Obligations prior to maturity. This Policy
does not insure against loss of any prepayment or other acceleration payment
which at any time may become due in respect of any Obligation, other than at the
sole option of Ambac, nor against any risk other than Nonpayment.
In witness whereof, Ambac has caused this Policy to be affixed with a facsimile
of its corporate seal and to be signed by its duly authorized officers in
facsimile ro become effective as its original seal and signatures and binding
upon Ambac by virtue of the countersignature of its duly authorized
representative.
/s/ [ILLEGIBLE] [SEAL OF AMBAC ASSURANCE CORPORATION] /S/ [ILLEGIBLE]
President Secretary
Effective Date: Authorized Representative
THE BANK OF NEW YORK acknowledges that it has
agreed to perform the duties ofInsurance
Trustee under this Policy
Form No.: 2B-0012(1/01) /s/ [ILLEGIBLE]
Authorized Officer of Insurance Trustee
[LETTER HEAD OF AMBAC]
Endorsement
Policy for: Attached to and forming part of Policy No.:
Effective Date of Endorsemen
In the event that Ambac Assurance Corporation were to become insolvent, any
claims arising under the Policy would be excluded from coverage by the
California Insurance Guaranty Association, established pursuant to the laws of
the State of California.
Nothing herein contained shall be held to vary, after, waive or extend any of
the terms, conditions provisions, agreements or limitations of the above
mentioned Policy other than as above stated.
In Witness Whereof, Ambac has caused this Endorsement to be affixed with a
facsimile of its corporate seal and to be signed by its duly authorized officers
in facsimile to become effective as its original seal and signatures and binding
upon Ambac by virtue of the countersignature of its duly authorized
representative.
Ambac Assurance Corporation
President [SEAL OF AMBAC ASSURANCE CORPORATION] Secretary
Form No.: 2B-0015(7/97) Authorized Representative
APPENDIX I
GENERAL INFORMATION CONCERNING THE CITY OF SAN JUAN CAPISTRANO
The following information concerning the City of San Juan Capistrano (the
"City") and surrounding areas is provided as supplementary information only, and
it should not be inferred from the inclusion of this information in this
Official Statement that the principal of or interest on the Bonds is payable
from any funds, taxes or other revenues of the City. The Bonds are payable from
the Revenues of the Water District and other security described herein. See
"SOURCES OF PAYMENT AND SECURITY FOR THE BONDS" herein.
LOCATION
The City encompasses 17.4 square miles and is located at the southern end
of the County. It is approximately 55.3 miles southeast of downtown Los Angeles
and 24.7 miles south of Santa Ana, the county seat. Neighboring communities
include the cities of Dana Point, Laguna Niguel, Mission Viejo and San Clemente.
GOVERNMENT
The City is a general law city and was incorporated in 1928. The City has
a Council-Manager form of municipal government. The City Council appoints the
City Manager who is responsible for the day-to-day administration of city
business and the coordination of all city departments. The City Council is
composed of five members elected bi-annually at large to four-year alternating
terms. The Mayor is selected by the City Council from among its members. Under
the 2002-03 fiscal year budget, the City employed a staff of approximately 68
classified employees and 16 exempt employees, including 25 full-time positions
which cover the operations of the Water District.
COMMUNITY SERVICES AND FACILITIES
The City provides a full range of municipal services, including street
maintenance, public improvements, recreation, golf, water, sewer, storm
drainage, planning and general administrative services. The City contracts with
the Orange County Sheriffs Department to provide on-site and localized police
services. The Orange County Fire Authority provides fire prevention/suppression
and emergency services to the City.
TRANSPORTATION
The City is within minutes of the San Diego Freeway (Interstate 5), the
San Joaquin Hills Transportation Corridor (State Route 73) and the Ortega
Highway (State Route 74).
Air cargo and passenger flight services are provided at the John Wayne
Airport, 21.1 miles northwest of the City, Ontario International Airport, 55.4
miles northeast of the City, Los Angeles International Airport, 59.2 miles
northwest of the City, and Long Beach Municipal Airport, 39.6 miles northwest of
the City.
Commercial and passenger rail services are provided by Union Pacific,
Southern Pacific, Atchison, Topeka and Santa Fe Railway Co., and Amtrak lines.
Trucking services are provided through numerous common and contract carriers.
I-1
UTILITIES
Additionally, other utility services are provided to City residents and
business by: San Diego Gas & Electric (electric), Southern California Gas
Company (gas), Pacific Bell (telephone) and Cox Communications (cable
television).
POPULATION
The historic population of the City, the County of Orange (the "County")
and the State of California (the "State") is shown below.
CITY OF SAN JUAN CAPISTRANO, COUNTY OF ORANGE AND STATE OF CALIFORNIA
POPULATION ESTIMATES
Year City of San Juan Capistrano County of Orange State of California
-------- ----------------------------- ------------------ ---------------------
1998 31,212 2,744,549 33,225,655
1999 32,253 2,788,767 33,765,185
2000 32,495 2,828,351 34,336,091
2001 34,100 2,910,000 34,758,000
2002 34,708 2,939,547 35,037,000
- ----------
Note: Years 1998 and 1999 population estimates were calculated with 1990
U.S. Census data and Years 2000 and 2001 population estimates were
calculated with 2000 U.S. Census data.
Source: California State Department of Finance, Historical City/County
Population Estimates 1997-2000, with 1990 Census Counts and E-5 City
County Population and Housing Estimates, 2000, 2001 and 2002.
I-2
EMPLOYMENT
The following table shows industry employment figures for the Orange
County Primary Metropolitan Statistical Area ("PMSA"), which includes the City
for calendar years 1996 through 2001. These figures are county-wide statistics
and may not necessarily accurately reflect employment trends in the City.
ORANGE COUNTY PRIMARY PMSA
ANNUAL AVERAGE INDUSTRY EMPLOYMENT/(1)/
Industry 1997 1998 1999 2000 2001
------------------------ --------- --------- --------- --------- ---------
Agriculture 6,900 6,600 7,000 7,600 7,100
Mining 900 900 700 600 600
Construction 58,100 65,500 73,800 77,600 80,400
Manufacturing 222,400 231,700 229,400 230,500 225,200
Transportation & Public 44,400 46,300 48,600 50,900 52,300
Utilities
Wholesale Trade 93,800 98,300 99,900 100,200 101,800
Retail Trade 216,000 224,200 231,600 239,500 247,200
Finance, Insurance & Real 92,900 100,400 104,200 105,800 111,800
Estate
Services 372,700 395,600 415,900 437,100 448,300
Government 132,700 136,400 141,10 146,600 150,900
Total, All Industries 1,240,800 1,305,800 1,352,100 1,396,500 1,425,400
- ----------
Note: The "Total, All Industries" data is not directly comparable to the
employment data found herein.
/(1)/ Employment is reported by place of work; it does not include persons
involved in labor-management disputes. Figures are rounded to the
nearest hundred. Columns may not add to totals due to rounding.
Source: State of California, Employment Development Department, Orange PMSA
Annual Average Labor Force and Industry Employment, March 2001
Benchmark.
I-3
The following summarizes the civilian labor force, civilian employment and
civilian employment figures over the period from 1996 through 2001 in the City,
the County and the State.
CITY OF SAN JUAN CAPISTRANO, COUNTY OF ORANGE, STATE OF CALIFORNIA
AND UNITED STATES LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT
YEARLY AVERAGE
Civilian Labor Civilian Civilian Civilian Unemployment
Year and Area Force Employment/(1)/ Unemployment/(2)/ Rate/(3)/
- -------------------------------- -------------- --------------- ----------------- ---------------------
1997
San Juan Capistrano 14,150 13,800 350 2.5%
Orange County 1,385,100 1,339,900 45,200 3.3%
California 15,947,200 14,942,500 1,004,700 6.3%
United States/(4)/ 136,297,000 129,558,000 6,739,000 4.9%
1998
San Juan Capistrano 14,670 14,350 320 2.2%
Orange County 1,435,100 1,393,700 41,400 2.9%
California 16,336,500 15,367,500 969,000 5.9%
United States/(4)/ 137,673,400 131,463,000 6,210,000 4.5%
1999
San Juan Capistrano 15,050 14,750 300 2.0%
Orange County 1,471,700 1,432,700 39,000 2.6%
California 16,596,500 15,731,700 864,800 5.2%
United States/(4)/ 139,368,000 135,208,000 5,655,000 4.2%
2000
San Juan Capistrano 15,460 15,160 300 1.9%
Orange County 1,511,000 1,472,700 38,300 2.5%
California 17,090,800 16,245,600 845,200 4.9%
United States/(5)/ 140,863,000 135,208,000 5,655,000 4.0%
2001
San Juan Capistrano 15,710 15,350 360 2.3%
Orange County 1,537,100 1,490,800 46,300 3.0%
California 17,362,300 16,435,200 927,100 5.3%
United States/(5)/ 141,815,000 135,073,000 6,742,000 4.8%
- ----------
/(1)/ Includes persons involved in labor-management trade disputes.
/(2)/ Includes all persons without jobs who are actively seeking work.
/(3)/ The unemployment rate is computed from unrounded data; therefore, it
may differ from rates computed from rounded figures in this table.
/(4)/ Not strictly comparable with data for prior years.
/(5)/ Beginning in January 2000, data are not strictly comparable with data
for 1999 and earlier years because of the revisions in the population
controls used in the household survey.
Source: California Employment Development Department, based on March 2001
benchmark and U.S. Department of Labor, Bureau of Labor Statistics.
I-4
The principal employers within the City and the number of employees are
shown in the table below.
CITY OF SAN JUAN CAPISTRANO
PRINCIPAL EMPLOYERS
Company Employees
---------------------------------- ---------
Capistrano Unified School District 854/(1)/
Fluidmaster Inc. 593
Endevco 370
Nichols Institute 228
Costco 150
St. Margarets School 150
Brown Bag Sandwich Co. 150
Capistrano Ford 124
Marbella Country Club 130
Barwick Automotive 105
- ----------
/(1)/ Approximate.
Source: City of San Juan Capistrano, Business Licenses.
CONSTRUCTION ACTIVITY
The following table summarizes the construction activity in the City
from fiscal years 1991-92 through 2001-02.
CITY OF SAN JUAN CAPISTRANO
CONSTRUCTION ACTIVITY
1991-92 THROUGH 2001-02
Commercial Industrial
Construction Residential Construction Other Additions, Pool, etc. Total Construction
------------------------- ------------------------ --------------------------- ------------------------
Fiscal No. of No. of No. of No. of
Year Permits Value Permits Value Permits Value Permits Value
- ------- ---------- ---------- ------- ---------- ------- ---------- ------- ----------
1991-92 20 1,175,200 23 10,780,190 971 11,163,734 1,014 23,119,124
1992-93 -- -- 109 25,029,624 1,100 9,714,771 1,209 34,744,395
1993-94 -- -- 132 27,549,466 1,608 7,359,554 1,740 34,909,020
1994-95 8 5,412,942 54 12,129,332 1,773 7,123,740 1,835 24,660,014
1995-96 4 2,963,073 301 44,366,564 2,000 7,953,877 2,305 55,283,514
1996-97 6 6,011,129 242 72,774,016 2,273 11,232,244 2,521 90,017,389
1997-98 8 12,526,482 225 64,614,579 3,058 13,827,688 3,291 90,968,749
1998-99 5 9,196,957 43 19,540,542 2,503 17,261,728 2,551 45,999,227
1999-00 21 16,330,908 68 23,814,142 2,281 24,541,816 2,370 64,686,866
2000-01 18 17,940,896 80 21,014,262 2,821 15,160,060 2,919 54,115,218
2001-02 17 15,535,452 84 21,317,874 2,688 13,503,079 2,789 50,356,405
- ----------
Source: City of San Juan Capistrano.
I-5
RETAIL SALES TAX
The table below shows retail sales in the City for 1997 through 2001.
CITY OF SAN JUAN CAPISTRANO
TAXABLE RETAIL SALES DATA
(000'S OMITTED)
1997 THROUGH 2001
1997 1998 1999 2000 2001/(1)/
---------- ---------- ---------- ---------- ----------
Apparel Stores $ 14,507 $ 12,969 $ 11,252 $ 11,500 $ 8,178
General Merchandise Stores 54,745 62,171 70,192 75,976 47,736
Food Stores 12,944 12,843 13,566 13,823 9,755
Eating and Drinking Places 30,872 32,426 35,575 36,576 28,164
Home Furnishings and Appliances 4,204 4,080 5,795 7,224 6,812
Building Materials and Farm Implements 20,593 24,031 26,247 30,684 23,912
Auto Dealers and Auto Supplies 112,136 146,626 174,507 197,865 167,235
Service Stations 20,019 18,611 20,792 23,393 18,201
Other Retail Stores 33,220 33,284 36,192 39,225 37,341
Total Retail Outlets $ 330,240 $ 347,041 $ 394,118 $ 436,266 350,334
All Other Outlets 61,077 87,165 112,624 111,743 72,010
Total All Outlets $ 364,317 $ 434,206 $ 506,742 $ 405,577 $ 419,334
- ----------
(1) First three quarters of data through September 30, 2001.
Source: California State Board of Equalization.
The table below shows sales tax revenues for the City for the last
five years.
CITY OF SAN JUAN CAPISTRANO
SALES TAX REVENUES
FOR THE FISCAL YEARS ENDED
JUNE 30, 1998 THROUGH JUNE 30, 2002
Fiscal Year Sales Tax Revenues
----------- ------------------
1998 $ 4,540,151
1999 5,270,098
2000 6,002,209
2001 6,050,832
2002 6,731,799
- ----------
Source: City of San Juan Capistrano.
I-6
EFFECTIVE BUYING INCOME
"Effective Buying Income" is defined as personal income less personal tax
and nontax payments, a number often referred to as "disposable" or "after-tax"
income. Personal income is the aggregate of wages and salaries, other than
labor-related income (such as employer contributions to private pension funds),
proprietor's income, rental income (which includes imputed rental income of
owner-occupants of non-farm dwellings), dividends paid by corporations, interest
income from all sources and transfer payments (such as pensions and welfare
assistance). Deducted from this total are personal taxes (federal, state and
local, nontax payments, fines, fees, penalties, etc.) and personal contributions
to social insurance. According to U.S. government definitions, the resultant
figure is commonly known as "disposable personal income."
The following table summarizes the Effective Buying Income for the County
and the State for the period 1997 through 2001.
COUNTY OF ORANGE AND STATE OF CALIFORNIA
EFFECTIVE BUYING INCOME/(1)/
Median
Total Per Capita Household Percent of
Effective Buying Effective Effective Households
Income/(2)/ Buying Income Buying Income over $50,000
---------------- ------------- ------------- ------------
1997
Orange County $ 48,027,189 $ 17,767 $ 42,715 40.3%
California 524,439,600 15,797 36,483 33.5%
1998
Orange County $ 50,605,637 $ 18,290 $ 45,176 43.4%
California 551,999,317 16,299 37,091 34.6%
1999
Orange County $ 55,179,528 $ 19,614 $ 48,773 48.7%
California 590,376,663 17,245 39,492 38.3%
2000
Orange County $ 62,330,828 $ 21,650 $ 55,262 55.1%
California 652,190,282 19,081 44,464 44.3%
2001
Orange County $ 62,568,674 $ 21,329 $ 53,277 53.6%
California 650,521,407 18,652 43,532 41.9%
- ----------
/(1)/ Not comparable with prior years. Effective Buying Income is now based
on money income (which does not take into account sale of property, taxes and
social security paid, receipt of food stamps, etc.) versus personal income.
/(2)/ Dollars in thousands.
Source: "Survey of Buying Power," Sales & Marketing Management Magazine, dated
1998, 1999, 2000, 2001 and 2002.
I-7
PROPERTY TAX REVENUES
The total assessed valuation of the property within the City for the
fiscal year 2000-01 was $3,304,879,224.
The City receives funds annually from the State based upon a percentage of
property taxes collected within the County computed on the City's respective
assessed valuation, and a statutory system of annual appropriations. The table
below presents the assessed valuation of property within the City for the past
five fiscal years.
CITY OF SAN JUAN CAPISTRANO
ASSESSED VALUATIONS
Total Before Rdv. Total After
Year Local Secured Utility Unsecured Rdv. Increment Increment Rdv.Increment
- ------- --------------- ----------- ------------ --------------- ------------- ----------------
1996-97 $ 2,296,959,931 $ 2,211,204 $ 80,270,800 $ 2,379,441,935 $ 212,192,178 $ 2,167,249,757
1997-98 2,351,160,574 2,324,688 129,852,260 2,483,337,522 214,171,599 2,269,165,923
1998-99 2,609,193,397 2,830,043 101,826,323 2,713,849,763 242,272,325 2,471,577,438
1999-00 2,916,901,599 2,990,383 116,406,815 3,036,298,797 305,562,109 2,730,736,688
2000-01 3,178,944,644 3,032,066 122,902,514 3,304,879,224 352,669,360 2,952,209,864
- ----------
Source: California Municipal Statistics, Inc.
The table below presents the City's property tax collection experience for
the last five fiscal years.
CITY OF SAN JUAN CAPISTRANO
PROPERTY TAX LEVIES AND COLLECTIONS
LAST FIVE FISCAL YEARS
Secured Amount Delinquent Percentage Delinquent
Fiscal Year Tax Charge June 30 June 30
- ----------- ----------- ----------------- ---------------------
1997-1998 $ 3,917,258 $ 98,795 2.5%
1998-1999 4,115,991 99,729 2.4
1999-2000 4,530,247 76,674 1.69
2000-2001 4,373,519 90,005 2.1
2001-2002 4,569,291 78,632 1.7
- ----------
Source: City of San Juan Capistrano.
EDUCATION
Public educational instruction from kindergarten through 12th grade is
provided by the Capistrano Unified School District. There are numerous private
schools in the City. There are 22 community colleges, colleges, universities and
graduate schools within 30 minutes commuting distance from the City in the
Orange County Metropolitan Area.
I-8
APPENDIX J
CERTAIN INFORMATION CONCERNING THE SERVICE
CONTRACT LETTER OF CREDIT PROVIDER
Bank of America, N.A. (the "Service Contract Letter of Credit Provider"),
is a national banking association organized under the laws of the United States,
and its principal executive offices are located in Charlotte, North Carolina.
The Service Contract Letter of Credit Provider is a wholly owned indirect
subsidiary of Bank of America Corporation and is engaged in general consumer
banking, commercial banking and trust business, offering a wide range of
commercial, corporate, international, financial market, retail and fiduciary
banking services. As of September 30, 2002, the Service Contract Letter of
Credit Provider had consolidated assets of $576 billion, consolidated deposits
of $394 billion and stockholder's equity of $50 billion based on regulatory
accounting principles.
Bank of America Corporation is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended, with its principal executive
offices located in Charlotte, North Carolina. Additional information regarding
Bank of America Corporation is set forth in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2001, together with any subsequent documents
it filed with the Securities and Exchange Commission (the "Commission) pursuant
to the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Service Contract Letter of Credit has been issued by the Service
Contract Letter of Credit Provider. Moody's Investors Service, Inc. ("Moody's")
currently rates the Service Contract Letter of Credit Provider's long-term
certificates of deposit as "Aal" and short-term certificates of deposit as
"P-l". Standard & Poor's Rating Services ("Standard & Poor's") rates the Service
Contract Letter of Credit Provider's long-term certificates of deposit as "AA-"
and its short-term certificates of deposit as "A-1+". Fitch, Inc. ("Fitch")
rates long-term certificates of deposit of the Service Contract Letter of Credit
Provider as "AA" and short-term certificates of deposit as "F-1+." Further
information with respect to such ratings may be obtained from Moody's, Standard
& Poor's and Fitch, respectively. No assurances can be given that the current
ratings of the Service Contract Letter of Credit Provider's instruments will be
maintained.
The Service Contract Letter of Credit Provider will provide copies of the
most recent Bank of America Corporation Annual Report on Form 10-K, any
subsequent reports on Form 10-Q, and any required reports on Form 8-K (in each
case as filed with the Commission pursuant to the Exchange Act), and the most
recent publicly available portions of the quarterly Call Reports of the Service
Contract Letter of Credit Provider delivered to the Comptroller of the Currency,
without charge, to each person to whom this document is delivered, on the
written request of such person. Written requests should be directed to:
Bank of America Corporate Communications
100 North Tryon Street 18th Floor
Charlotte, North Carolina 28255
Attention: Corporate Communications
PAYMENTS OF DAILY DELAY LIQUIDATED DAMAGES DUE FROM THE COMPANY UNDER THE
SERVICE CONTRACT WILL BE PAYABLE FROM DRAWINGS UNDER THE SERVICE CONTRACT LETTER
OF CREDIT. ALTHOUGH THE SERVICE CONTRACT LETTER OF CREDIT IS A BINDING
OBLIGATION OF THE SERVICE CONTRACT LETTER OF CREDIT PROVIDER, THE BONDS ARE NOT
DEPOSITS OR OBLIGATIONS OF BANK OF AMERICA CORPORATION OR ANY OF ITS AFFILIATED
BANKS AND ARE NOT GUARANTEED BY ANY OF THESE ENTITIES. THE BONDS ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY
AND ARE SUBJECT
J-l
TO CERTAIN INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT
INVESTED.
The information contained in this Appendix J relates to and has been
obtained from the Service Contract Letter of Credit Provider. The information
concerning Bank of America Corporation and the Service Contract Letter of Credit
Provider contained herein is furnished solely to provide limited introductory
information regarding Bank of America Corporation and the Service Contract
Letter of Credit Provider and does not purport to be comprehensive. Such
information is qualified in its entirety by the detailed information appearing
in the documents and financial statements referenced above.
The delivery hereof shall not create any implication that there has
been no change in the affairs of Bank of America Corporation or the Service
Contract Letter of Credit Provider since the date hereof, or that the
information contained or refereed to in this Appendix J is correct as of any
time subsequent to its date.
J-2